Understanding the ‘RRR of Investments

Yet another magnum opus from S S Rajamouli, ‘RRR’ is racing toward the global collection of Rs 1,000 crore. The film is based on a fictional story, yet the title of the film perfectly summarises the investment framework for any investor. Your portfolio is made up of different investment instruments. These instruments and your portfolio need to be analysed from the ‘RRR’ perspective. The first ‘R’ is returns. Every investment instrument gives you a different return. From equity you can expect returns in lower double digits for extended periods of time.

In case of debt or fixed income instruments, however, returns might not be as high as equities and you can expect return in single digit for a longer investment horizon. Most investors might have majority of their investment in these two instruments only. Nonetheless, some of the seasoned investors would also have commodity in their portfolio whose returns mostly come in lumps. The second ‘R’ is risk. Every instrument has distinct risk characteristics. Equities carry higher risk compared to debt. There are different ways of measuring risk. 

Drawdown, which measures a peak-to-trough decline during a specific period for an investment, is one of the most commonly used risk measures. Equities have larger drawdown, which means they tend to fall higher than many other asset classes. During the course of the pandemic, equities saw a drawdown of almost 40 per cent. Fixed income instruments, on the other hand exhibit lower drawdown. They normally do not have drawdown in double digits. Commodities can have drawdown of as much as 70-80 per cent. 

During the pandemic, the price of oil, which was on the boil currently, saw a rare phenomenon of negative price with a drawdown of more than 100 per cent. The third ‘R’ of your investment process is rebalancing, which means realigning the weight of different assets in your portfolio by periodically buying or selling assets to keep the original asset allocation intact. This helps you in keeping a check on your return and risk aspect of portfolio. If you long for good entertainment, you can go and watch ‘RRR’ and for better investment experience you should definitely follow the ‘RRR’ of investment. 

SHASHIKANT