Choose The Right Investment Products To Build Wealth

In today’s complex financial environment, one of the biggest challenges for any investor is to make right investment decisions. Considering that investors have a wide range of financial products to choose from, it should ideally not be a very difficult task. However, investors err in more than one ways while making investment decisions and pay the price in the long run, either by losing a part of their capital or compromising in terms of returns.

Many investors fail to strike the right balance between risk and reward. Depending upon the moods of the market, they either become ultra-conservative or extremely aggressive or often invest without any defined time horizon. Then there are investors who often ignore the fact that investment products vary greatly in degree and type of risk as-well-as potential return. Therefore, to get the best results, one must have a mix of traditional as-well-as market related products in the portfolio. However, the key is to have them in the right proportion based on one’s investment goals as-well-as the need to get tax efficient returns.

Investors also make the mistake of making product selection their top priority rather 58 DSIJ.in MAR 24 - APR 6, 2014 than initiating their investment process with deciding on an appropriate asset allocation for themselves. It is important to focus on asset allocation as it determines the kind of risk one takes and the kind of returns one can expect from the portfolio. The risk profile of an investor plays a major role in ascertaining what would be an ideal asset allocation. Broadly speaking, there are three different categories of risk tolerances i.e conservative, moderate and aggressive.

While a conservative investor will accept lower returns to minimise price volatility, a moderate investor would be all right with slightly greater price volatility to pursue higher returns. On the other hand, an aggressive investor wouldn’t mind higher volatility in the valuation of the portfolio to seek higher returns.

It is important for every investor to understand that he needs to tackle two major risks while managing his portfolio i.e risk of losing a part of the capital as-well-as risk of inflation that erodes the value of his money over time. While for a short-term investor, loss of capital is a bigger risk, a long-term investor gets more impacted by inflation risk. Therefore, tax efficient investment options like mutual funds must have a key role to play in every investor’s portfolio.

It is also equally important to have a well diversified portfolio. Although mutual funds themselves are diversified, it helps to branch out across funds following different investment strategies and philosophies. However, diversification becomes counter- productive if one has too many funds in the portfolio. For example, if one has 15 funds in the portfolio, it does not necessarily mean that the portfolio is adequately diversified. To determine the right level of diversification, one needs to consider the size of the portfolio, types of funds and allocation to different asset classes. Therefore, it is possible that a portfolio having 5 schemes may be adequately diversified whereas another with 15 schemes may have very little diversification.

It is nice to see more investors making efforts to have the right mix of investment options in their portfolios. However, there are still some areas where improved knowledge can make a difference. Therefore, every investor must make an honest effort to familiarise himself with different investment options and also ask the right questions to DS his advisor, if s/he has one.

Hemant Rustagi
CEO, Wiseinvest Advisors