Guidelines To Achieve Investment Success

The performance of the stock market is commendable in the current scenario and a strong and stable government at the centre has fuelled the expectations of a prolonged rally. Considering that retail investors have been conspicuous by their absence from the market, this rally is likely to get broad based with their participation at some stage. Needless to say, mutual funds can be the right way for small investors to invest their equity allocation in a disciplined manner.

Similarly, on the debt side of the portfolio, mutual funds offer a variety of options such as fixed maturity plans, short term income funds as well as income funds following accrual strategy. Although the 10 year G-sec yield is likely to remain range bound at around 8.70-8.90 levels for some time, one can expect the interest to start softening over the next few quarters.

 Although retail participation in some of these debt fund categories is better than equity funds, it is much below the desired level. It is a pity that despite being a potentially better and more tax effi cient investment option, mutual funds has a very low penetration in the retail segment. It’s time for investors to expand their investment universe to earn healthy and risk adjusted returns on their investments.

 HERE ARE A FEW GUIDELINES THAT CAN HELP YOU ACHIEVE INVESTMENT SUCCESS:

 Time Horizon - Time horizon is the expected number of years; one is willing to stay invested to achieve an investment objective. Time horizon plays a key role in deciding your asset allocation. Since a longer term time horizon enables you to withstand the volatility risk by waiting out slow economic cycles and the inevitable ups and downs of the markets, the bias should be towards an asset class like equity. On the other hand, if you intend to invest for achieving a short term goal, debt and debt related instruments should be the mainstay of your portfolio.

Risk Tolerance - Risk tolerance is an investor’s ability to withstand the volatility in order to achieve higher potential returns. Therefore, build an aggressive portfolio only if you have the capacity and experience to withstand the volatility that exists in the market place. On the other hand, if you are an inexperienced and/or conservative investor, you must opt for a conservative asset mix that that will preserve your original investment.

HERE ARE SOME OF SOME OF THE RISKS AND HOW TO TACKLE THEM:

 Longevity risk - You might outlive your assets. Hence, it is absolutely necessary to design a portfolio that has the potential to provide positive real rate of return over time.

Market risk - Market risk is the risk where the value of your investments will decrease due to fluctuations in the market. The most important way for you to manage risk in your portfolio is through diversification. There are many different ways to diversify the portfolio such as by investing in different asset classes, sectors, market capitalization as well as geographically. Another important strategy to manage risk is to rebalance the portfolio periodically. This is surely one way of buying low and selling high in a disciplined manner.

 Inflation risk - Inflation risk is the risk of losses resulting from erosion of an income or in the value of assets due to the rising costs of goods and services. It is one of the major risks for those investors who invest mainly in traditional investment options like FDs, bonds and debentures.

Behavioral risk - Quite oft en investors do not act in their own interest when faced with uncertainties. This causes substantial impact on their investment results in the long run. Therefore, the key is to stick to your investment plan irrespective of the market condition.

Hemant Rustagi
CEO, Wiseinvest Advisors Pvt Ltd