The Role Of Planning In Investment

What can you do to ensure that your investments will yield returns at the time and in the measure you need them to? Make sure your investment decisions are guided by an overall plan to avoid getting overwhelmed by the surfeit of options.

In today’s complex investment environment, it is absolutely critical to make the correct investment decisions. Fortunately, investors today have plenty of options to secure their financial future. However, this can also make it quite overwhelming for them to choose the right option that suits their investment needs. Investing in the available options in the right proportion holds the key to creating the optimum balance between risk and reward. Here are the factors to keep in mind as you go about investing your money:

Avoid Making Ad Hoc Decisions

It is quite common to see investors making ad hoc decisions while investing their hard-earned money. Factors like establishing investment objectives, planning asset allocation and having an investment strategy are ignored. As a result, investors often end up developing a portfolio that becomes either too conservative or too aggressive. Bear in mind that your risk tolerance and investment objectives should be the dominant factors while deciding what percentage of your investments should be put into each of the asset classes, i.e. debt, equity, gold and real estate. Besides, an asset allocation strategy can help you achieve realistic financial goals within a defined time frame, and that too without losing sleep.

Time Diversification Holds The Key

Time diversification, i.e. remaining invested over different market cycles is particularly important especially when you invest in a volatile asset class like equity. It helps in mitigating the risk that you may encounter while entering or exiting a particular investment or category at a bad time in the economic cycle. Longer time periods smoothen out those fluctuations.

The length of time for which you remain invested is important because it can directly affect your ability to reduce risk. Longer time horizons allow you to take on greater risks with a greater potential of earning better returns, as some of these risks can be reduced by investing across different market environments. If your time horizon is short, you would have greater liquidity needs and hence, the focus has to be on liquidity with reasonable certainty of the safety of your capital.

However, if you don’t have the capacity and the temperament to remain invested in a volatile asset class over relatively longer time periods, avoiding such investments would be the best thing to do.Invest To Beat Inflation Considering that inflation eats into a substantial part of your returns over the years, the tax efficiency of investment options plays a crucial role in improving the real rate of return over the long run. Mutual funds are among the most tax efficient investment options.

Also, while these steps can help you in achieving financial independence, it is equally important to be 'debt free'. Though it may not be possible to achieve a fully debt-free status in today’s world, debts on account of over-spending definitely need to be controlled. Follow A Disciplined Investment Approach Many of us believe that the best way to maximise returns is through ‘market timing’− a strategy in which one tries to buy before the market goes up and sell before the market goes down. The fact, however, is that very few people can predict market movements with any degree of accuracy. Hence, you may be able to achieve much better results simply by following a disciplined investment approach.

Starting the investment process at an early age and having a disciplined approach can go a long way in building a retirement kitty large enough for you to earn your freedom from retirement blues.

Look Beyond Performance

Many mutual fund investors make the past performance of a scheme the sole criterion for investing in it. While past performance certainly has a role to play in the decision-making process, there are a few other factors that also need to be considered. For example, an individual investing in an equity fund should also take a closer look at the other equity funds of the same fund house.

It is crucial to ascertain whether the fund house has the required expertise to benefit from the potential of different segments of the market as well as from different investment philosophies. This can be useful in case changes need to be made either due to non-performance or in view of any revisions in your investment objective/s and time horizon.

HEMANT RUSTAGI
CEO, Wiseinvest Advisors Pvt. Ltd.