It’s Time To Expand Your Investment Universe

These are interesting times for investors. Both equity as well debt markets are doing well and are likely to deliver healthy returns going forward. If investors plan their investments well by considering their time horizon and risk profile, they can improve their overall returns without compromising on the safety of their capital. However, considering the complexities related to making investment in these markets, it is important for them to select the right investment options and follow a strategy that can work efficiently during the ups and downs of the markets.

Mutual funds make for one such option that allows investors to design a portfolio for different goals, time horizons, and risk profiles. In fact, mutual funds also score over other investment options in terms of liquidity, flexibility, tax efficiency, and variety. Unfortunately, despite being the most versatile investment vehicle, mutual funds have failed to find a permanent place in the investment universe of the investing public.

Although the efforts of all the stakeholders like mutual funds, advisors and regulators in creating awareness about mutual funds have been yielding positive results, there is a lot that needs to be done to make mutual funds the most preferred investment option for investors.  In this process, investors themselves have a major role to play. It’s time for them to look at mutual funds differently as that will help them benefit from the true potential of this wonderful investment vehicle.

While investors need to adopt a forward-looking investment approach to become a successful investor, it is equally important for them to overcome dilemmas that usually emerge out of their not-so-pleasant past experiences. It’s important because investors faced disappointments in the past due to mismatch between what they expected from mutual funds and what MFs were capable of delivering. Therefore, the question that needs to be addressed is whether the fault lies with this investment vehicle or with its wrong positioning as well as erratic strategies adopted by investors to invest in it. It is a proven fact that if one chooses the right funds and adopts a disciplined approach to investing, the chances of achieving different investment goals within defined time horizons increase manifold.

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It is equally important to adopt different strategies to get the best out of different asset classes. For example, equity investments require time commitment and hence one must have the patience to wait out the turbulent times. Trying to time the market can be a futile exercise. Many investors who try to do so end up making the classic mistake of buying high and selling low. Remember, a long-term investment approach can make life easier for you.

Many investors also face the dilemma of whether to invest a lump sum or invest systematically. While investors who have an investment plan in place can straight away invest the money as per the plan, it can be a difficult task for those who do not have one. For them, the prevalent market conditions often override all the other factors No wonder, many investors end up acting imperfectly when faced with such a situation.

While a volatile or a depressed stock market prompts them to take refuge in the safety of traditional instruments, a rising stock market encourages them to adopt an aggressive strategy. Both these extreme approaches can be harmful to their long-term interests. For example, an extremely conservative approach can negate an investor’s inflation hedging capability. Similarly, an aggressive investment strategy can expose him to the risk of losing a part of his capital itself.

Therefore, new investors must begin their investment process by defining their investment objectives as well as deciding on their time horizon. During the initial stages of portfolio building, the focus should be on those diversified funds that have an established long-term track record. As regards the strategy to invest, if one is looking to make a ‘one-off’ investment, it would be prudent to invest say half the money as a lump sum and the remaining half through a Systematic Transfer Plan (STP). Under STP, the money can be invested in an ultra-short term debt fund and then transferred at a pre-determined interval, say on a monthly basis, into a pre-decided equity fund. This approach would also help an investor in avoiding the mistake of committing too much money at a particular market level.

However, if one is reasonably sure about investing in an equity fund on a regular basis, even if it is not at a short interval, one can go ahead with the lump sum investment without worrying too much about the market level. Similarly, if the intent is to invest in a debt or debt-oriented fund, one can invest a lump sum any time.