Reassess Your Investment Process

Reassess Your Investment Process

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

The ability of mutual funds to offer options to suit your varied goals makes them an ideal investment option. However, investors achieve different level of results from their mutual fund investments. Some of the key reasons for their inability to get the best from mutual funds are choosing funds that don’t match their needs and not attempting to balance risk and reward. That’s why identifying the right level of risk tolerance and choosing the right funds should be the key focus areas while designing your portfolio.

For example, if you are an aggressive long-term investor, your portfolio composition should be different from someone who may have a different time horizon and risk profile. Simply put, if you decide to invest in an aggressive fund, make sure that you have the risk appetite required to tackle the risk of volatility and that there is a place for such a fund in the portfolio. If you are not sure about the composition of your portfolio, it’s time to have a close look at your portfolio to ensure that it remains on track to achieve your investment goals without exposing you to un-warranted risks. Don’t hesitate to take help of a professional if you are not confident of doing it yourself.

As is evident, the temptation to increase exposure to aggressive categories of funds like those investing in small-cap stocks, sector as well as thematic funds can derail your investment process. While some of these categories of funds, if chosen well, have the potential to enhance overall portfolio returns, a disproportionately higher exposure in them can create an imbalance in risk and reward. Remember, balancing risk and rewards holds the key to your investment success. One of the key factors that can help you achieve this is to have the right asset allocation for long-term goals as these require you to accumulate a large corpus.

For example, asset allocation at pre-retirement period i.e. 8 to 10 years before retirement is quite critical. That’s because most investors can be expected to have taken care other

"While it is natural to get affected by the euphoria in a rising market and the panic in a falling market, it shouldn’t influence your long-term investment strategy."

Important long-term goals like children’s education and buying a house, by the time they reach this stage. Moreover, these are usually the best years in terms of capacity to save and invest as compared to earlier years. Considering the time on hand before you need to start generating regular income, equities must be an integral part of the portfolio. Of course, the proportion of allocation to different asset classes holds the key from risk and reward point of view.

One thing that must be avoided during this stage is to take a new loan as it can disrupt your investment process. There may not be enough time to repay and that can put pressure on your investment process for retirement. If you are already repaying an existing loan, the attempt should be to repay it as early as possible. Of course, the ability to do so will depend upon the quantum of loan and surplus available. Any lump sum received by way of bonus, etc. could be used to pre-pay the loan. However, before doing so one must consider the residual tenor and the rate of interest.

Last but not the least, you must continue with your investment process un-interruptedly irrespective of the market conditions. While it is natural to get affected by the euphoria in a rising market and the panic in a falling market, it shouldn’t influence your long-term investment strategy. Remember, volatility in the stock market is a natural phenomenon and hence you must be prepared to tackle it at all times.


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