Is Your Portfolio On Track?

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

Investing is a process that requires every investor to create a balance between risk and reward.  Some of the factors that can help an investor achieve this include asset allocation, attitude towards risk, time horizon and the extent to which risks to life, health and assets are covered. It is quite common to see a mismatch of varying degree between how investors design their portfolios and what they intend to achieve through them. It is important to rectify the imbalance in the portfolio so as to improve the chances of achieving different investment goals. While the truth is that if one doesn’t take enough risk, healthy returns would remain a distant dream; taking too much risk could turn one’s dreams into hair-raising nightmares.

This is where an asset allocation strategy helps in keeping investments on track to achieve the desired results. Asset allocation is the process of combining various asset classes such as equity, debt, real estate and commodities into a portfolio. While asset allocation provides a roadmap, it is equally important to stay on course for long-term investment to benefit from the power of compounding. Remember, the real power of compounding comes with time. Essentially, compounding is the idea that you can make money on the money you have already earned. That’s why, the earlier you start investing, the more your money can work for you.

Look at it another way: for every 10 years you delay before starting to save for retirement, you will need to invest three times as much each month to catch up. No matter how young you are, the sooner you begin investing, the better. Another significant aspect of successful investing is having a strategy for exiting from an investment. It is important to note that a proper strategy helps you avoid taking decisions that are dictated by emotions rather than any logic. Investors often err by either holding on to funds for too long or exiting in a hurry. One needs to do a thorough analysis before taking a decision to sell.

In other words, the focus has to be on long-term track record rather than short-term performance. A long-term track  record moderates the effects which an unusually good or bad short-term performance can have on a fund’s track record. Besides, longer term track record compensates for the effects of a fund manager’s particular investment style. In an era of constant changes and volatile financial markets, it is important for investors to keep their investments on track through their defined time horizon. While it is great to see investors taking interest in their investment process, the ‘do it yourself’ (DIY) strategy could expose them to unwarranted risks if they are  not sure about their ability to make the right investment decisions.

Although investing in a regular plan is more expansive as compared to a direct plan, the benefits of keeping the asset allocation intact far outweigh the increased cost in the long run. Besides, working with an advisor helps in having a strategy for monitoring the progress of the portfolio. Last but not the least, the tax efficiency of portfolio returns plays a crucial role in improving the real rate of return in the long run. Tax efficiency becomes even more important when you invest to achieve medium to long-term investment objectives like children’s education, buying a house and retirement planning. After all, how much you get to keep at the end of your time horizon decides how successful you would be in achieving your investment goals.

Investment options like mutual funds provide tax-efficient returns. For example, any gains from investment in equity and equity-oriented funds held for 12 months or more are considered as long-term capital gains and are taxed at a flat rate of 10 per cent. Similarly, any gains from investments held in debt funds for three years or more are considered as long-term capital gains and taxed at 20 per cent after claiming indexation. For investors in higher tax brackets, it can make a significant difference when compared with taxation on traditional options wherein returns are taxed at their nominal tax rate. Therefore, you must have a ‘tax aware’ investment strategy in place to improve your post-tax returns.