Ensure A Time Commitment For Your Investments

Time is an important consideration when investing in equities. A suitable time horizon can help build your portfolio and even out market volatility.

KEY POINTS:

• There are two key decisions to be made with regard to any investment. The first is when to buy and the second is when to sell. Obviously, the difficult decision is to know when to sell.
• Equities have the potential to not only beat inflation in the long run but also build wealth by making money grow at a healthy rate. Even the most volatile markets cannot undermine the long-term potential of equities.
• While even those who invest through SIPs may suffer losses temporarily during the market downturn, the impact on their portfolio would generally be much less. This is because they continue to invest at lower levels, and that turns volatility to their advantage by bringing their average cost down over time.

One of the major attractions for investing in equity is its ability, as an asset class, to beat inflation over the longer term. However, haphazard investment decisions and inconsistent investment approach often result in disappointment for investors. Considering that the stock markets look set for a good show going forward, following the right approach can go a long way in benefiting from the true potential of equities.

Equity fund investors hope to be suitability rewarded for the risk taken by investing in this volatile asset class. No wonder, their spirits soar when the stock market does. However, as the good going continues, the excitement often morphs into fear – the fear of losing all the gains and in some cases, even a part of the original investment if the markets were to fall. This is when investors often let their emotions dictate their investment strategy.

It is well known fact that there are two key decisions to be made with regard to any investment. The first is when to buy and the second is when to sell. Obviously, the difficult decision is to know when to sell. In the current market scenario, the right strategy would be to not only hold on to existing quality investments but also continue with the investment programme if one is sure about one’s time commitment. A long-term investor should consider the market level as only a milestone in the long march of the economy. For a new investor, any time should be a good time to begin the investment process, provided the intent is to not only invest for the long-term but also through a disciplined investment approach.

However, inspite of a remarkable recovery in the stock markets, investors’ response to equity funds has been lukewarm. It is a pity that only a small section of investors continue to rely on equities to build wealth over time. Unfortunately, short-to-medium term market movements continue to influence the investment decisions of a large number of individuals. As a result, equities have not been able to find a permanent place in the asset allocation process of Indian retail investors.

Tackling market volatility can undoubtedly be quite a challenge for investors. However, it is important to remember that equities have the potential to not only beat inflation in the long run but also build wealth by making money grow at a healthy rate. Even the most volatile markets cannot undermine the long-term potential of equities.

The encouraging sign, however, is that the number of investors investing through systematic investment plans (SIPs) has been on the rise over the last few years. While it is true that even those who invest through SIPs may suffer losses temporarily during the market downturn, the impact on their portfolio would generally be much less. This is because they continue to invest at lower levels, and that turns volatility to their advantage by bringing their average cost down over time. Therefore, the more money they invest at the lower levels, the lesser recovery they have to make to turn their portfolio’s performance around. Investors who have continued their systematic investment process over the last four-five years will vouch for this, as their current portfolio valuations look completely different as compared to that of a few months ago.

For an equity investor to be successful, it is important to follow certain norms before starting the investment process rather than taking ad hoc decisions. For example, one needs to assess one’s risk taking capacity as that goes a long way in tackling the risks associated with equity investing. Another crucial factor is to diversify one’s portfolio adequately. Tracking the portfolio is an important ingredient to achieve investment success.

Finally, getting the best from mutual funds boils down to having the appropriate funds in your portfolio in the right proportion. The key is to ascertain the right level of risk tolerance, as this helps in customising fund category allocations as well as suitable fund selection. Before making a final selection of funds, one must examine the quality of the portfolio as well as the performance track record.

Hemant Rustagi
CEO, Wiseinvest Advisors Pvt. Ltd.