Light Up Your Diwali With Bright Investment Decisions

This festive season, take some time to review your investment strategy to bring a sparkle to your portfolio, says Hemant Rustagi.

KEY POINTS:

• Asset allocation is the key to investment success in the long run, helping investors maintain the right balance between risk and reward.
• Investors must opt for continuity in their investment approach on a long-term basis rather than adopting haphazard short-term strategies. A disciplined investment approach takes care of most of the imperfections in the market.
• For new investors, the right way to begin investing in mutual funds would be to consider well-diversified funds that invest predominantly in large-cap stocks and have a small exposure to mid and small-cap stocks.

Diwali is a festival that brings lights and prosperity, hope and joy to everyone’s life. Diwali is also a time to acknowledge our biases as well as shortcomings, and start the process of rectifying them.

If you are one of those investors who have experienced failures due to certain misperceptions and/or having a bias towards traditional investment options, it’s time to make amends. This Diwali, you must commit to make bright investment decisions to ensure a great financial future for your loved ones. Here’s how you can do this:

Follow an asset allocation model: Asset allocation is the key to investment success in the long run. It helps in determining the kind of risk you are likely to take and the kind of returns you can expect from your portfolio. It also helps in maintaining the right balance between risk and reward.

It is equally important for you to choose the right investment options in each asset class to get the desired results. Though asset allocation should ideally be the first step in the decision-making process, many investors move right away to the selection of investment options. This either takes them beyond their risk tolerance or makes their portfolio too conservative.

You must consider factors such as variety, flexibility, liquidity, tax efficiency and transparency while selecting an investment option. It is here that an investment option like mutual funds scores over most other instruments.

Follow a disciplined approach: While there are investment strategies for equity investors to tackle different market conditions, the unpredictable nature of the stock market, especially in the short to medium-term, makes it difficult for them to practice these with a reasonable degree of success. That is why you must opt for continuity in your investment approach on a long-term basis rather than adopting haphazard short-term strategies.

A disciplined investment approach takes care of most of the imperfections in the market. Although systematic investing is often perceived as an option only for small investors, the fact is that its utility has nothing to do with the size of the investment. Systematic investing will benefit you partly because it abandons any strategy that might prompt you to time the market and partly because stock markets tend to perform better than other asset classes in the long run.

Look beyond short-term performance: There is a tendency among investors to rely on the short-term performance of funds. Needless to say, too much of emphasis on short-term performance can be suicidal as it doesn’t reflect the true potential as well as the risks associated with a fund.

While performance can be a useful tool for judging which scheme to get into, it is important to keep performance in perspective. Your objective should be to select funds that suit your requirements depending upon your investment objectives and time horizon.

Have a truly diversified portfolio: Many investors fail to get the best out of their mutual fund investments as they follow a hodgepodge strategy to invest in them. For example, not much attention is paid to having the right exposure to different market segments such as large-cap, mid-cap and small-cap stocks.

There cannot be a standard combination applicable to all kinds of investors as each investor has a different risk profile, time horizon and investment objectives. If you are an existing investor, the existing allocation has to be considered. However, if you are a new investor, the right way to begin would be to consider well-diversified funds that invest predominantly in large-cap stocks and have a small exposure to mid and small-cap stocks.

Invest according to your time horizon: Time horizon is the expected number of years you will be investing for to achieve an investment objective. If you intend to invest for the long-term, you would generally have the capacity to invest in riskier or more volatile asset classes as you can wait out the inevitable ups and downs of the markets. On the other hand, if you wish to invest to achieve a short-term goal, you are likely to have less appetite for risk-taking.

Hemant Rustagi
CEO, Wiseinvest Advisors