April 29, 2015
General reaction of any businessman or entrepreneur towards savings/investing is that his/her business generates huge returns that no investment can ever match. They believe that it is highly rewarding to reinvest all their earnings in their existing business.
It is certainly correct that good businesses generate attractive wealth for their promoters and investing in one own’s business should be the first priority of any businessman. However, I share my views on why a businessman or entrepreneur should invest some part of his earnings in equity mutual funds on a regular basis.
Fulfill personal financial goals
In their passion to grow their business, businessmen often tend to invest all their earnings in existing business. They often forget that there are personal/family financial goals like child education and marriage, purchase of house, vacation etc. which have to be fulfilled and for which investments are needed outside the business. It may not be possible or prudent for him to take out money from the existing business to fulfil these financial goals as and when they arise. Withdrawal of lacs of rupees to fund higher education or marriage of a child may cripple his entire business.
Therefore, a businessman should separate his business investment and investment for personal/family needs. He may well look at investing in equity mutual funds to create funds for his long termfinancial goals. Equity funds give him convenience to invest as and when he can spare money for his family goals and also provide attractive returns over long term.
Diversification of business
A businessman engaged in a particular business may be doing very well due to his individual competency for that particular business and due to positive environment around the product or service that his business is offering. He may be having knowledge and experience to run and grow his business on a continuous basis.
However, it is well known that every business faces up and down cycles over a period of time. Change in government regulations, changing customers’ tastes and preferences, fierce competition and many more reasons may create adverse conditions for a smoothly running business. It is therefore important to have a diversified business so that adversity in one business may be supported by good show of other businesses.
For a businessman or an entrepreneur who is willing to diversify, it is not always possible to learn about new businesses, infuse capital, create a team and wait for profits to come. But by investing in equity mutual funds, a person can put some part of his earnings in other businesses that are reputed, well managed and growing. An equity fund invests the investors’ money in different, good quality businesses with proven track record and competent management. Therefore, by investing in an equity mutual fund, a businessman can diversify his money in other businesses, which he may not otherwise be able to start and grow on his own.
Tap market opportunities
Many a times we hear conversations like ‘Auto companies are doing very well; Software companies are making huge profits from global markets’. What it means is that at times we know certain businesses are doing well and making good profits for their owners. Despite knowing this, it is not possible for every existing businessman to start a new business which is looking attractive. Another example, despite knowing that government shall now be spending lot of money on infrastructure projects in the country, not every businessman can start an infra/construction/engineering company to benefit from this opportunity.
A growth oriented equity fund tries to identify such companies which shall deliver superior returns to its shareholders and invests in them. Hence, by investing in an equity mutual fund, a businessman can tap opportunities in the market without actually getting into those businesses (Which he, anyway, may not be able to start due to lack of knowledge and expertise, capital and time)
Another important point is that once the attractive looking opportunity is over, the equity fund may itself exit that business and may invest the money in some other business opportunity whereas it is not possible for anybody to start and exit his own created businesses anytime he wants to.
Create capital for future use
In future, a businessman may have to upgrade technology, set up new offices/factories, expand into new lines of business. By investing a part of his profits in an equity mutual fund, he can build a fund outside his business that can be used for any of the business requirements in future. Over a period of time, the equity fund shall not only help to keep some part of his money away from his business but shall also help in growing it at attractive returns. Funds created from internal earnings shall make the balance sheet stronger and also minimize the need to borrow money from the market/banks, thus saving from interest burden.
A businessman/entrepreneur who is growing his business passionately and investing all his earnings in business would do well by not putting all eggs in one basket. By investing in other businesses through equity mutual funds he can look for diversification of his business, can participate in other business opportunities available in the market, create capital at attractive returns for future use and can create wealth to fund his personal financial goals. Businesses need long term planning and regular investments and equity mutual funds can certainly play an important role in this process.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org .