Don’t Allow Myths To Cloud Your Investment Decisions

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Investing in market-linked products can be quite challenging for the investors who are not familiar with them. While it is heartening to see increasing number of investors making market-linked products an integral part of their portfolios, there is still a large section of investing public that remains skeptical about the role these products can play in their wealth building process.

Investors must know that market-linked products offered by mutual funds allow investors to invest in different asset classes such as equity, debt and gold in such ratios that may suit their time horizon and risk profiles. The fact that there are variety of funds available for investing in each of these asset classes wherein fund managers follow different investment philosophies and strategies makes it easier for investors to design a well balanced portfolio. However, the key to get the best from these funds is not to allow myths to cloud their investment decisions. Here are some of these myths and how one can tackle them:

Equity is a risky asset class
No doubt, equity market tends to be volatile over short and medium term. However, over the longer term, it has the potential to out-perform other asset classes provided one is willing to stay committed to pre-defined time horizon and follow a disciplined investment approach.Investing in a good performing funds guarantees higher returns 
The problem here is that if you chase short-term performance, either you will make your portfolio more aggressive or more conservative than you would have liked it to be. That's because, in good times, you will be tempted to invest more in equities and in volatile times in debt funds. Remember, the key factors are to focus on asset class that suits your time horizon and invest in funds that are consistent both in terms of following their investment philosophies and providing returns vis-à-vis their peer group.

Investing in many funds provides high level of diversification 
While diversification helps in mitigating the risk and volatility, investors need to realize that mutual funds themselves are diversified investment option. For example, someone investing in an equity fund gets to invest in a basket of stocks across market caps and sectors even if investment is as low as Rs 1,000. Therefore, having too many funds may prove to be counter-productive as it can make monitoring the portfolio more complicated and pull down performance of the portfolio if some non-performing funds remain in the portfolio. 

Book profits periodically
Many investors face the dilemma of when to sell their funds. Once they see healthy returns in the portfolio, they often get tempted to exit from some of the funds. After exiting, they wait for the market to come down so that they can invest at lower levels. However, if that doesn't happen, they get tempted to reinvest at much higher levels and hence end up increasing their average cost rather than protecting the gains. The right way to book profits, if at all, is to rebalance the portfolio once a year. Rebalancing of the portfolio is very effective as it ensures that one stays invested in different asset classes at all times. Moreover, having a pre-decided interval for this exercise makes returns more tax efficient. Investing thru SIP means no losses It is a proven fact that investing through SIP brings in a discipline in one's investment process as some money is kept aside towards achieving varied investment goals. Besides, when one invests in an asset class like equity through SIP, it brings the average cost down and helps in keeping emotions out of investment process. However, it would be wrong to assume that if one invests thru SIP, there won't be any looses in the portfolio. The fact is that SIP minimises losses in the short term and improves returns in the long-term. Therefore, every investor who signs up for SIP, must be prepared to tackle periods of negative returns over short and medium term and avoid making any abrupt decisions.