Be A Prudent Investor
3/7/2013 9:00 PM Thursday
Sidestep some of the most common investor errors to make the most of your investments, advises Hemant Rustagi
Investing money judiciously holds the key to one’s long-term investment success. However, the fact is that investors are prone to making errors while making investments. As a result, they either fail to achieve their investment goals or end up suffering from certain misconceptions that cloud their investment decisions.
Here are some of the aspects of portfolio management in which investors go wrong and how they need to tackle them:
Make risk management the top priority
While risk management in the form of life insurance cover, health insurance and an emergency fund should be the top priority, many investors either do not have adequate risk cover or ignore this aspect altogether. Proper risk management ensures that in case of an unfortunate event of the death of the sole or any of the earning members of the family, the dependants in the family will not have to face any financial hardship.
While most investors own an insurance policy, they generally focus on traditional investment policies like endowment, whole-life policies or unit-linked insurance plans. As a result, they end up paying a substantial part of their investments towards the premium of these policies, that too without getting adequate risk cover. The returns are also so low that they struggle to beat inflation.
Switch from traditional instruments to market-linked debt products
Risk-averse investors prefer to invest a substantial part of their portfolio in traditional debt instruments like FDs, bonds, debentures and small savings schemes. The fact that a large number of investors prefer to invest in these instruments despite low and tax-inefficient returns testifies that they do not take into consideration the threat that inflation poses to their investment.
This is where market-linked debt options like income funds of mutual funds score over traditional debt options. Not only do these funds have the potential to offer better returns than traditional investment option, but the returns are also tax efficient. Here, it is important for investors to choose the right fund, as there are a variety of funds available in this category which are suitable for different time horizons. Besides, an inverse relationship between interest and bond prices requires investors to actively manage the debt mutual fund portfolio to realign it with the changing interest rate scenario as well as to protect the gains already made.
Time commitment key to successful equity investing
It is important for investors to realise that trying to time the market can be a futile exercise. This not only exposes them to much higher risk, but also doesn’t prepare them for the bumpy ride.
Thus, it is a pity that there is such a low retail participation in an asset class like equity, which is potentially the best option to create wealth over time. No doubt, equity markets tend to be volatile over the short and medium terms. However, the potential that equities have to outperform other asset classes over the long term cannot be undermined. Therefore, it is time for retail investors to consider equities as effective long-term investment options to earn healthy tax-free returns.
One of the requirements to become a successful equity investor is to have a time commitment and follow a disciplined approach. For example, investing in quality diversified equity funds through systematic investment plans (SIPs) can be an ideal way for small investors who would like to build wealth through smaller contributions.
The long-term performance of equity funds has been quite impressive. For example, there are a number of funds that have delivered annualised returns of around 15-18 per cent over the last 15 years or so. The key to success is to opt for the right fund, follow a disciplined strategy and invest in the right proportion.
Balance your exposure to gold
There is definitely a case for having gold as an integral part of one’s portfolio, as it has a negative correlation with other preferred asset classes. One does face the risk of price fluctuations, but this can be tackled by investing systematically and by choosing the right way to invest in metal.
It is always prudent to opt for paper gold when buying for the purpose of investment. Buying paper gold is a simple, secure and tax efficient way to invest in gold. There are broadly three ways of buying paper gold, i.e. ETF, gold savings funds and e-gold. As for the exposure to gold from an asset allocation point of view, it should be around five to 10 per cent of your portfolio.
CEO, Wiseinvest Advisors
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