Understanding The Risk Associated with Speculation: The Right Way

The financial year 2024-25 has been closed and now the time has come to file the income tax returns (ITR) which reminds of an interesting, yet shocking story revealed by a chartered accountant (CA) of one of his clients.

While filing an income tax return (ITR), Assam-based CA found that a B-tech student with no active source of income booked a massive loss of Rs 26 lakh from trading in futures and options (F&O). The student who was stoned by the greed of making quick money took loans from financial apps and friends while his parents were unaware of his side hustle.

Such instances are not rare, rather common in the world of speculative trading in the equity and derivatives segment. Recently, a farmer received a tax demand of Rs 69 crore as he failed to report his trading activities during income tax.

Sweet Speculation

Let’s understand what this jargon means. Speculation means predicting that prices of certain assets would go up or down and taking bets to make money. It is not backed by proper fundamentals or research, a bet which is so uncertain that luck plays an important role. 

Speculation is like a sweet craving, once you have it you crave it more until the tooth hurts.

In a chase to make quick money, youths take risky bets without financial planning and throw money into tools like F&O and equity trading. And it does stop here, speculation goes into crypto trading, forex trading, commodity trading and betting apps of cricket where you make your own team but ruin your own luck is a different kind of temptation. And wait, are we forgetting something? Oh yeah! We hope everyone remembers buying virtual land on the moon through NFTs by metaverse.

SEBI Reveals

A 2024 report published by the market regulator Securities and Exchange Board of India (SEBI) revealed that more than 90% of the F&O traders suffered loss in FY24. As per the SEBI reports the percentage increased from 89% to precisely 91.1%.

The report revealed that approximately 11.3 million distinct individual traders together suffered losses of Rs 1.81 lakh crore from FY 22 to FY 24. Whereas, only 7.2% of individual F&O traders reported profit in the three years period and only 1% earned more than Rs 1 lakh profit.

You see, such tools of getting rich in a short span of time from the equity market is still an utopia for most of the retail traders. However, the foreign portfolio investors did make a profit of Rs 280 billion in FY 24. Moreover, as the retailers continued to burn money in the F&O trading, the government earned Rs 34,881 crore in FY 24 through securities transactions tax (STT) and other taxes. While individual traders collectively lost Rs 75,000 crore in FY 24.

Speculation At Right Time

Now, the problem is not speculative trading but speculation at the wrong time where you cannot afford a few losses, where you put everything on stake. If we look at the financial pyramid by MINTIT, speculation forms the top of the pyramid when all the layers of insurance, savings, growth assets like gold, real estate, mutual funds etc are formed.

However, people without guidance misunderstand and take the bottom down approach and start building wealth straight with speculation tools. Doing this you put your financial security at risk, opportunity of building growth assets at risk.

MINTIT suggests that speculative bets should be done when you have accumulated enough assets, and your financial pyramid is strong enough to take shocks of a few losses. It suggests that it should also not have a significant portion allocated compared to your overall portfolio.

Speculation bets if taken at the right time on right assets can create exponential bets, your money can skyrocket and multiply far beyond than any other assets. However, you need to build your financial assets first with the bricks of insurance, savings and growth assets. You can learn how to build a strong financial pyramid in the MINTIT’s education library with simplified blogs for you.

Easy Ways To Make Long-term Wealth

So, before you indulge in speculative trading, learn to build wealth first. Let’s take the case of that B-tech student who lost Rs 26 lakh in speculative trading. Had he invested that same lumpsum amount in an index mutual fund which is the safest bet with a compounded annual growth rate (CAGR) of 15% for 10 years, guess what? He would have made more than Rs 1 crore. That’s called the magic of compounding. 

Again, such instances are not rare, rather common in the world of long-term investing via systematic investment plans (SIPs).

Folks, in the world of investing the main principle is to save the principle. It’s a long-term game, and if your capital is gone, you’re out of this game. The discipline of systematic investing combined with the power of compounding can create huge wealth if done consistently. On the other hand, speculative bets, debts and losses are the routes to poverty.

It is you to decide, SIPs or speculative bets where the odds are only 1% with a negligible gain of Rs 1 lakh in F&O. However, if you choose mutual funds, then you are not going to be alone in the journey. MINTIT, India’s only dedicated Mutual Fund Platform which caters to your personalised goals and accompanies you to achieve your financial milestones is eager to help you build your wealth. Depending on your profile it precisely suggests a suitable investing plan to achieve your goals.

When the temptation of quick money, more money hits your heart, always remember a quote by André De Shields, “Slowly is the fastest way to get where you want to be.”

Happy Investing!