Aim To Be A Prudent Investor

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Investing money judiciously holds the key to your long-term investment success. However, in reality, we often leave some loose ends in our investment process that either expose us to unwarranted risks or make us compromise on some of the important goals of our lives. In fact, we even suffer from certain misconceptions that cloud our investment decisions.

Considering that investing is an ongoing process, you must aim to be a prudent investor. Here are some of the aspects of your investment process that must remain your priority at the start as well as during the defined time horizon and how you need to tackle them.

Risk management 

The first step in investment process should be to have adequate risk cover in the form of a life insurance cover, a health insurance and an emergency fund. A proper risk management ensures that dependants in the family do not have to face any financial hardship in case of an unfortunate event of the death of the sole or any of the earning members of the family.

While many investors own insurance policies, they generally focus on traditional investment policies like endowment, whole-life and unit-linked insurance plans. As a result, they end up paying a substantial part of their investments towards the premium of these policies and that too without getting an adequate risk cover. Even the returns in the traditional plans are so low that they struggle to beat inflation. Therefore, a combination of a term plan and mutual funds should be preferred.

Fund selection

Fund selection is very important as the stock-picking ability of the fund managers as well as their investment strategies are usually the major differentiators between different funds. Hence, the focus should be on the quality of the portfolio.

It is also important to consider longer term performance of funds, rather than relying on short term one. It is equally important to analyze the performance in the right manner, that is, to compare it with fund’s benchmark and its peer group. Investors must know that funds investing in different segments of the market behave differently when the market does well, and also when it spirals down.

Portfolio tracking

It is heartening to see an increasing number of investors taking their fund selection process seriously and looking beyond past performance by focussing on factors such as consistency in performance as well as investment philosophy and the strategy followed by the fund manager. However, monitoring the perofrmance of funds in the right way remains an area where investors often falter.

The dilemma that many investors face is about the frequency at which the portfolio needs to be reviewed and what should be the strategy to exit from non-performing funds. Investors get into the habit of tracking performance on a daily basis and that compels them to make haphazard changes in the portfolio. While reviewing one’s portfolio is one of the key elements to achieve investment success on a consistent basis, frequent reviews can be counter-productive as funds having varying degree of exposure to equities are likely to react to market movements in both positive and negative manner. However, these funds perform well over the longer term and that helps investors achieve some of their important goals.

If you are looking to work out a strategy to monitor the progres of your portfolio, it will be a good idea to begin with a halfyearly review. However, make sure that review is not done with the sole purpose of making changes in the portfolio. Simply put, do not allow short term performance to drive your decisions. Do not make the mistake of either holding on to funds for too long or selling them in a hurry without giving sufficient time to fund managers to show the results of their investment philosophies and strategies.