Making right investments decisions to create profitable Investment Portfolio
The right attitude for exploring opportunities
A gamut of investment opportunities are available today, ranging from bank fixed deposits, postal savings, company deposits, investments in government bonds and company bonds/debentures to equity markets, public provident fund and equity mutual funds. Each of these has great potential for generating returns, so one should always have multiple asset classes in the portfolio and not be skewed towards one asset class.
We think everyone is investing. Risk profiling is a important step in financial planning towards wealth creation. In addition, one must remember that economic conditions or market conditions will not always remain the same. There will be ups and downs. Historically, buying during panic has always been a rewarding experience. However, those who switch to ‘sell mode’ or ‘stay in cash’ during panic-stricken situations do not benefit from this.
Staying away from equities is no good idea
In today’s environment, many people are behaving in a panic-stricken fashion and staying away from equity investing (even withdrawing/redeeming savings from equity mutual funds or direct equity) and investing in short-term options such as low duration fixed maturity plans and short-term income funds. However, staying away from equities will not help in creating wealth in the long term. While lump sum investment into equities may not be a preferred choice today, systematic transfer plans (switching from liquid funds to equity funds) is a prudent approach. This drip feeds your investments into equity mutual funds, thereby enabling you to take advantage of the volatility which the markets may show due to the uncertain global economic environment.
Invest in appropriate Mix of short-tern and Long-term Plans
An investment portfolio should have a mix of multiple investment options .across time horizons-short, medium and long terms. Short-term surplus should not be invested in equities as it is fraught with risk. At the same time, long-term surplus should not be invested in liquid funds or kept as idle balance in savings account. There has to be a well-thought-out mix of options, diversified across asset classes and geography. An investor must have some idle cash in the savings account for any emergency..
In addition, short-term surpluses (say for 0-6 months) could be parked in liquid funds or short duration FMPs, which, on an inflation and tax adjusted basis, have the potential to offer good returns. Short-term income funds could be a good alternative for surplus of 6-12 months, and income funds/bond funds could be an investment option for 12-24 months time horizon.
While the above mentioned approach takes care of the short-term to medium-term needs, one must look at equities for surplus beyond 2-3 years. If one has an investment horizon of 5-10 years, the probability of success achieved out of equity investment is fairly high. A prudent approach is to drip feed your investments using either the SIP or STP route rather than attempting to time the market, which is practically impossible. SIP/STP investing over the long term (3/5 years plus) into equity funds should work towards one's wealth creation needs. Short-term market movements should not make you nervous as you have invested for the long term. Within equities also, one should have a combination of domestic equities and international equities. Different markets/ countries perform differently across time. You can't be always invested in the best performing stock or equity fund and, similarly, you can't be invested in the best-performing country always. There is undeniable merit in diversification.
In summary, all asset classes have the ability to generate returns for investors. One's portfolio should not be skewed towards any particular asset class or geography. Last, but not the least, please don't make any heroic attempt to time the market. It's fairly certain that success won't be on your side unless you are extremely lucky and never mistake 'luck' for 'wisdom'. Happy investing!