A high entry barrier is often the first indication of whether you are suited for such an investment
July 23, 2020 / 11:45 AM IST
Investments are generally analysed on parameters such as safety, liquidity and returns. However, rarely do investors consider the ticket size as an important factor while evaluating an investment. In reality, a high entry barrier is often the first indication of whether you are suited for such an investment.
Ticket size is nothing but the minimum amount that an investment avenue requires. For an equity mutual fund, just Rs 5,000 is good enough. What does a high minimal investment threshold tell you?
Entry barrier for risk-averse investors
A high entry barrier signals high risk levels. Therefore, such an investment may not suit everyone. For example, the lot size of a futures contract in the equity derivatives segment ensures that the notional value runs to a few lakh of rupees. So, at 11000 Nifty level, one futures contract of Nifty 50 with lot size of 75, makes the notional value Rs 8,25,000.
In the case of portfolio management services and alternate investment funds, the thresholds are Rs 50 lakh and Rs 1 crore, respectively. It is an indication that such products are meant for sophisticated investors who understand the risks. Newbies should stay out of these investments, even if they have the funds. A PMS, for instance, may invest in a concentrated portfolio and follow niche strategies that may result in severe volatility in returns. A mutual fund, when compared to a PMS, is a vehicle for the masses. It is much more diversified and the fund manager cannot take undue risks.
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Large tickets restrict the ability to sell
Investments that have high entry barriers typically also have restrictions when you sell. A real-estate property that takes up around, say 50 percent of your overall portfolio, would be hard to sell if the property market is cold.
When you accumulate units of equity mutual funds over many years, you have the option of selling everything in one go or in small lots.
Sometimes, minimum investment becomes some sort of a constant commitment.
When you open a public provident fund account, you are effectively agreeing to pay each year. If you fail to do so, a small penalty of Rs 50 is payable for each unpaid year.
But the stakes can be high if you sign up for an investment product offered by life insurers. If the commitment to pay your annual premium runs in lakhs, it can be a tricky situation in case of loss of job or income. The minimum premium payment tenure for most regular premium policies is five years, but in some cases it can be more. If you fail to pay all instalments, then the benefits of such policies may not be paid.
The minimum investment or commitment often shows you a vehicle’s nature. High ticket sizes are not bad; they’re just not meant for everyone.
Nikhil Walavalkar
first published: Jul 23, 2020 11:28 am
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