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Avoid Shortcuts To Achieve Investment Success

| 10/18/2012 9:00 PM Thursday

In investment decisions as in life, shortcuts can end up costing you more than you had bargained for. Resist the temptation to take the quick route to big returns, and maintain discipline in your investments, advises Hemant Rustagi.

KEY POINTS

  • If one selects the funds carefully and invests with a clear time horizon, the ‘buy and hold’ strategy can work wonders.
  • Rebalancing the portfolio, probably once a year, keeps the risk levels within one’s acceptable limits and also ensures that one remains invested in different asset classes at all times and does not move into or out of an asset class completely.
  • For a risk-averse investor, consistency will be a more important measure than the total returns. A fund can have very impressive total returns over time, but can be very volatile and therefore tough for a risk-averse investor.

Every investor aspires to get the best returns on his/her investments. However, in order to achieve this, one must follow a disciplined approach to investing and opt for the right investment products.

A collective investment vehicle like a mutual fund has all the ingredients that are essential to achieve investment success. It is a well-known fact that MFs offer the best in terms of transparency, tax efficiency, liquidity and professional fund management. However, to get the best out of this wonderful investment vehicle, it is important to resist the temptation to resort to shortcuts. More often than not, ‘get rich quick’ ideas backfire.

Here are a few situations that require an investor to guard against such temptations:

Buying Low, Selling High
All investors would like to buy low and sell high. However, very few of them are actually able to do so. This is because short-term market movements can be quite unpredictable. In fact, even the most experienced of fund managers find it difficult to time the market successfully on a consistent basis. No wonder then, when common investors try to do this, they invariably find the market moving in the opposite direction.

The best strategy for a common investor is to invest for the long term and have a disciplined approach towards investing. If one selects the funds carefully and invests with a clear time horizon, the ‘buy and hold’ strategy can work wonders.

Even more important is the need for investors to ensure that the portfolio mix does not take them beyond their risk-taking capacity. Hence, rebalancing the portfolio, probably once a year, not only keeps the risk levels within one’s acceptable limits but also ensures that one remains invested in different asset classes at all times and does not move into or out of an asset class completely.

Investing In Award-Winning Funds
Investors often get tempted to invest in award-winning funds. The common belief is that an award-winning fund can be a great bet to earn fantastic returns. While such a fund can add value to the portfolio, the key is to establish the suitability of the fund to one’s investment goals.

Equally relevant is the methodology followed to choose winners. Some of the criteria often used to decide winners are consistent performance, risk-adjusted returns, total returns and protection of capital.

Each of these factors is very important and has its own significance for different categories of funds. Besides, each of these factors has a varying degree of significance for different kinds of investors. For example, consistent return really focusses on risk. For a risk-averse investor, consistency will be a more important measure than the total returns, i.e. growth in NAV as well as the dividend received. A fund can have very impressive total returns over time, but can be very volatile and therefore tough for a risk-averse investor. Therefore, not all award-winning funds across different categories may be suitable for everyone.

Investing In International Funds
To add a dash of glamour to their investment portfolios, retail investors sometimes rush to invest in international funds. In the Indian context, these funds are basically domestic fund of funds that invest in an international fund. For someone who has a well-diversified portfolio of domestic funds, global diversification can undoubtedly add value as international markets are diverse and some of them have excellent growth potential. In other words, by investing outside India, one can expand the pool of potential investment opportunities. Besides, some of the factors influencing the international markets could be different from the ones that affect Indian markets. Before investing, however, one must consider the potential of the markets in which the fund proposes to invest.

For retail investors, though, it may not be a great idea to invest in an international fund right away. They will do well by focussing on developing a portfolio of domestic funds with different philosophies as well as by having the right mix of large cap, mid-cap and small cap stocks. Once that is done, they can gradually include specialty funds and funds investing in international markets.

Hemant Rustagi
CEO, Wiseinvest Advisors

 

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