KEEP INVESTMENT CHALLENGES AT BAY

Every investor, new or experienced, has to face numerous challenges during the investment process. The challenges may start from the stage of deciding asset allocation and continue through the entire time horizon. While asset allocation determines potential returns and attendant risks, decisions regarding rebalancing and monitoring the portfolio are crucial from the point of view of keeping a track of the portfolio. The level of investment success depends upon how an investor handles these challenges. Here are a few tips on how you can tackle these challenges:

Balance Risk and Reward

Being a successful investor is all about balancing risk and reward. Therefore, as an investor, you must focus on identifying your risk tolerance level and deciding a suitable asset allocation. Simply put, your asset allocation should reflect your risk profile. The right way to decide your asset allocation is by aligning it to your time horizon. For example, if you decide to invest in equity funds, you must have risk appetite as well as a time horizon required for such an investment. Therefore, equity should be the mainstay of your portfolio while investing for long-term goals like building a corpus for children’s education and retirement planning. Similarly, while investing for a short-term goal, debt and debt-oriented funds should be considered as the focus has to be on the safety of capital and earning returns which are higher than what traditional options offer while the returns are tax-efficient. 

Avoid Unwieldy Portfolio

Monitoring the progress of the portfolio is as important as making the right selection. That’s why it is necessary to have a compact portfolio without compromising the level of diversification. Mutual funds are an effective way of achieving the right level of diversification by investing in carefully selected funds. Remember, over-diversification is generally the result of following a haphazard approach. As a result, you may end up building a portfolio consisting of good as well as bad performing funds. Needless to say, the presence of non-performing funds pulls down the overall portfolio performance.

Focus on Goals 

While portfolio valuation gets affected by short-term performance of the stock market, it is vital that you don’t allow it to influence your long-term investment strategy. For example, a falling market may tempt you to either invest aggressively or abandon an asset class like equity completely. Remember, both these extreme reactions can jeopardize your financial future. While making regular investments is the perfect way to benefit from equity or equity-related investments, a haphazard approach to realign the portfolio amidst short-term volatility is most likely to backfire. Moreover, when you make an attempt to speed up the process of recovering losses in the portfolio by investing short-term surplus money, the result may not be in line with your expectations. The unpredictable nature of markets over the short term makes it difficult even for professional fund managers to time the market. However, over the long term, the short-term fluctuations tend to smooth out.

Simply put, you shouldn’t get disillusioned by negative or poor returns of equity funds over short and medium term. The key is to analyze their performances vis-a-vis the benchmarks and the peer group. Remember, even the most consistent fund managers are likely to deliver negative returns when the markets correct. Therefore, short-term negative returns - in line with the market - from a fund that has been doing well for years doesn’t warrant any reaction. Similarly, even a poorly performing fund could give decent returns when the markets are doing well. Also, the impressive returns may be due to the aggressive investment strategy of the fund manager that may expose you to higher risk than your accepted level. 

It is quite common to see investors getting tempted to invest in income funds to take advantage of the expected rate cuts in future. For tax-paying investors, debt funds could prove to be a good option in the emerging interest rate scenario. Of course, the key would be to select the right fund depending on one’s time horizon as the major differentiator between different types of debt funds is the maturity duration of their portfolios. You must know that if the rate cuts do not happen in the manner being envisaged by the market, you will have to encounter increased volatility as well as the risk of lower returns. 

As is evident, you must have a strategy in place to rebalance the portfolio, if need be. No doubt, it can be tough at times to redeem in a rising market or to invest in a falling market. However, rebalancing imposes discipline and ensures that your portfolio mix doesn’t take you beyond your defined risk profile.