Musings under the shower series: Lottery linked equity mutual funds

While people like me keep harping about the merits of investing in equity mutual funds for the long run, let us be honest – this stuff though it’s simple is really tough to execute.

Now what if you and I were given the chance to solve this problem for the mutual fund industry.

How would we do this?

My two cents below..

The fascination for lotteries

Recently my mom returned from a trip to Kerala and had a surprise for me. She had bought along with her a few lottery tickets and asked me to check for the results.

Now while I knew that the odds of us winning a lottery was obviously minuscule, still for a minute I was subconsciously dreaming about the possibilities of what all we could do if we won the lottery.

However irrational, the prospects of winning was damn exciting!

The fact that I am still writing this blog post on a lazy Sunday afternoon gives you a clear sense of my lottery results.

Leaving my sad story behind, have you ever wondered..

Why do lotteries lure us?

Behavioral scientist Dan Kahneman explains it beautifully

“When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule. A lottery ticket is the ultimate example of the possibility effect. Without a ticket you cannot win, with a ticket you have a chance, and whether the chance is tiny or merely small matters little. Of course, what people acquire with a ticket is more than a chance to win; it is the right to dream pleasantly of winning.”

Thus, for most of us, while the odds are low it is the hope of “what if it could be me” and the opportunity it provides for us to dream about winning, that motivates us to spend on lotteries.

So here is the crazy idea –

What if we could add a free lottery ticket element to equity mutual funds!

The plan goes like this,

Currently the top 3 mutual fund companies – HDFC Mutual Fund, ICICI Mutual Fund & Reliance Mutual Fund make profits above Rs 500 cr.

They decide to keep say Rs 30 cr out of their profits every year to reward investors who have trusted them and have stayed with their funds over the long run.

Lottery 1: Rs 1 cr each for the lucky 10 investors picked randomly

People eligible for this:

• Anyone who has done a continuous SIP streak of more than Rs 10,000 per month for a period between 5 to 10 years (if there is a break in between the investor wouldn’t be eligible) in any of their equity funds
• Anyone with an initial investment above Rs 5 lakhs initial investment and has stayed for a period between 5 to 10 years in any of their equity funds

The overall idea is to give the investors an incentive to stay put with the funds over a reasonably long period of time and experience the power of long term in equities.

Lottery 2: Rs 2cr each for the lucky 10 investors picked randomly

• Anyone who has done a continuous SIP streak of more than Rs 10,000 for a period more than 10 years (if there is a break in between the customer wouldn’t be eligible) in any of their equity funds
• Anyone with an initial investment above Rs 5 lakhs initial investment and has stayed for more than 10 years in any of their equity funds

Once a person wins the Lottery 1 he wont be eligible for participating in Lottery 1 for the next 10 years. He can prolong his holding period to 10 years and participate in Lottery 2.

Again once a person wins the Lottery 2 he won’t be eligible for participating in Lottery 2 for the next 10 years.(The idea being that, he has a real life experience of the merits of long term investing and will be a much better investor going forward. Also this creates the space for others to benefit)

The ultra rich can be disqualified by having a cut off based on annual income tax paid or some other method.

This lottery process will happen every year. So even if the investor is not selected this year, there is always the incentive to extend the holding period for another year and participate again.

As the mutual funds become more profitable, the prize money and the number of people chosen can be increased.

Now even if you don’t end up lucky, assuming you held on till 10 years, then more often than not you will be mighty pleased with your original investment outcome.

What do you think about this idea? Will this work?

There is nothing more powerful than all of us putting our brains to solve this problem. So it would be fun if you could pen down your suggestions/ideas in the comments section.

Who knows, we might end up discovering the holy grail of long term investing..

P.S: As with most ideas, we as humans will try to game the system. If there is something that I have overlooked do let me know. We can improve upon this.

And also I have conveniently ignored the regulatory angle (the strict SEBI). The idea is to come up with some creative ideas and hopefully we can make it work someday.

As always happy investing folks.

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