No Shortcuts, Please!
Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors
Every investor aspires to achieve investment success so as to create wealth over time. Considering that investment is an ongoing process, one must have an investment plan and investment strategy in place to keep it on track. While doing so, certain key factors like the current financial situation, investment objectives, attitude towards risk and the time horizon must be given their due. It pays to define the risk at the start of any investment process. While most of us equate risk with the potential to lose a part of the capital, there are risks such as inflation that don’t allow your money to grow in real terms.
Besides, it would help to know that risk is an inherent part of investing and that there is a direct co-relation between risk and reward. The level and the type of risk would depend on your time horizon i.e. the length of time you have to achieve your investment goals. If you are investing for a shorter duration, volatility is a bigger risk than inflation. Therefore, the focus should be on capital protection through a portfolio consisting of interest-bearing securities. On the other hand, when you invest for long-term, the real rate of return i.e. post-tax returns minus inflation becomes crucial to protect the value of money.
Besides, compounding plays an important role as it helps you in making money on the money already earned. The real issue, therefore, is how can you find and maintain your balancing point that can ensure success at a risk level you are comfortable with. Remember, creating wealth is a process that requires discipline and commitment to invest on a regular basis. Therefore, you shouldn’t allow short-term turmoil in the markets to block your vision for a better financial future. The right way to proceed would be to look for appropriate and tax-efficient options like mutual funds rather than investing haphazardly in options that offer lower returns and lack tax-efficiency.
Equity as an asset class has proved its worth as wealth creator, the world over. However, the probability of facing higher volatility in the short to medium term keeps investors away from the stock market. It is important for investors to realise that volatility risk can be tackled by following a disciplined approach whereby money is invested on a regular basis. Also, an important thing to consider is the level of exposure to equities vis-à-vis your overall portfolio size. Simply put, it is the level of exposure to equities in your portfolio that decides the likely impact on overall returns and the level of risk.
For conservative investors, traditional investment options like bank deposits, bonds and small savings schemes have been the mainstay of their portfolios for years. Though as a category these instruments do address their concern for the safety of their hard-earned money, most of these do not have much of a role to play in the wealth creation process. The time has come to look beyond these for at least a part of the portfolio and explore options like hybrid and equity funds offered by MFs. These are not only tax-efficient and flexible but also have the potential to provide better returns. As is evident, the process to create wealth requires you to not only adopt a disciplined approach but also choose the right options and in the right proportion.
More importantly, the possibility of achieving important long-term investment goals for your loved ones depends upon the wealth created over your lifetime. Therefore, you must ensure that in case of any eventuality, these goals are not compromised. To ensure this in today’s uncertain world, you must have sufficient life insurance cover. Of course, the quantum of insurance cover would depend upon your personal situation. It is equally important to opt for a suitable insurance product like a term plan. Last but not the least, take help of a professional advisor if you are not confident about how to wade through the maze of the investment world.