Save prudently and Invest even more wisely
It all begins with a Plan
At the outset, it is important to define
your life goals which would help
define your investment goals. This
homework will help you make the
most of investment universe
comprising stocks, bonds, currency,
commodities, real estate, gold and
other asset classes.
A well-researched plan defines your
financial needs based on key life
milestones, income and net worth,
mandatory obligations like loan
instalments and emergency money,
and the risk appetite (amount of risk
you are willing to take)
Diversify to manage risk and
maximize reward
Risk denotes uncertainty of returns.
Low-risk plans offer relatively low
yields but are less susceptible to
market fluctuations. High-risk
strategies offer potential for higher
returns, but also higher volatility.
As per media reports, only 10% of
Indian investors have a diversified
portfolio. This is a risky proposition.
One should strike a judicious blend of
fixed-income investments like bonds
and moderate to high-risk
investments like equities to balance
out growth and stability.
Think Long term
Long-term investing is an effective
strategy for building sustainable
wealth over time. Short-term
investment strategies focus on quick
gains marked by higher trading
frequency and lower holding periods.
Investors tend to hold their
investments only for a 2-3 year span
which is not adequate time to earn
significant returns. Markets are
cyclical, but if the investments are
fundamentally sound, the long-term
story stays intact.
‘Know’ before you Invest
One should understand the dynamics
of any asset class before committing
funds to it. It is imperative to study
the pros and cons of each asset
class guided by research reports and
expert advice. Don’t invest based on
hearsay or peer pressure. Remember,
renowned investors have achieved
remarkable success by investing in
familiar sectors.
If you know your investments, you will
also have a better understanding of
the cyclicality associated with them.
With this better understanding, one
will not have a knee-jerk reaction to
short-term volatility arising out of
various factors which are not directly
impacting the investment.
Be disciplined
At the onset, make a financial plan
and invest accordingly. In the long-
term, small but regular investments
have proven to generate better
returns. Take the Systematic
Investment plan (SI) route and start
investing every month. This also
allows you to benefit from Rupee-
Cost Averaging. Gradually, as your
invest-able surplus increases, start
investing more.
Dividends are not bonuses
Mutual fund schemes offer dividend
plans. Do not get lured to a scheme
simply because it has declared a
dividend. Once a scheme pays out a
dividend, its NAV reduces
accordingly. This means that
dividends are paid from your own
holdings. Unless it is imperative to
receive dividends, invest in growth
plans, which are ideal for long-term
capital appreciation.
Include Balanced Funds and
Index Funds
If you have a predominantly equity-
based portfolio, consider balanced
funds to lend some amount of
cushioning. These are ideal for
meeting challenges like inflation,
interest rates, market volatility and
for achieving diversification. At the
same time, consider index funds as
cost-effective mutual funds that may
help mitigate fund house and fund
manager related risks.
Stay true to your risk appetite
Based on the investment objective,
underlying securities and investment
methodology, every mutual fund
scheme carries different amount of
risks. While equity funds have the
highest risk, liquid funds carry the
least. Choose a scheme that suits
your risk appetite.
Regular Monitoring
One of the most crucial aspects, that
most investors ignore, is about
monitoring their investments and
examining its performance vis-a-vis
their investment objectives. Periodic
monitoring allows one to take
corrective actions and stay on track.
Take expert assistance
Investment is all about chasing risk-
adjusted returns. It involves
diversification to various asset
classes, understanding the risk-return
reward matrix, the liquidity
associated with asset classes, and
the importance of time that needs to
be spent with your investments. It is a
complex mix and hence it is always
prudent to seek an expert’s
assistance while investing.
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