Portfolio diversification is important since you cannot put all your eggs into one basket.
By Raghav Iyengar
Most of us have understood the importance of investing our money, rather than just saving it. Despite that, the financial world can seem daunting for the new investor. With help from professionals and determination to take ownership of your investment portfolio, you can make wise investment decisions. Just don’t let common misconceptions sway you from your goal.
Let’s look at five broad guidelines to keep in mind when investing:
No right time to enter the market
No one can guarantee when the market will perform well. You can make predictions based on your analysis of the market but even the most seasoned market advisors will not be able to tell you when you should enter/exit the market. The answer is that you just enter! What investors must understand is that time invested in the market is more important than timing the market. When you invest, the ideal approach should be to invest for the long-term to ensure capital appreciation and wealth creation.
Balancing between diversification and over-diversification
Portfolio diversification is important since you cannot put all your eggs into one basket. But at the same time, diversification needs to be meaningful. You cannot have a few schemes in your portfolio all dedicated to one particular category of funds! That may not help you achieve your investment goal. The objective of diversification is protection of investment portfolio by ensuring exposure across multiple asset classes. Over-diversification might lead to reduction in returns rather than offsetting the reduction in risks. As a general rule of thumb, having exposure to at least 3-4 asset classes (like equity, fixed income, hybrid, global funds, etc.,) and diversifying even within those into actively or passively managed funds might help in ensuring better returns.
Risk is not all that bad
Seasoned investors understand that risk and returns go hand in hand. Investors think that taking high risk will give them high returns, but that’s not the reality. Truth be told, taking low risk can also give you reasonable returns. There is no investment which comes with ‘no risk’ and taking calculated risk is not bad at all. Riding on the back of multiple initiatives and investor awareness programmes, investors have now started understanding the importance of risk-adjusted returns. Ideally, it should be seen as what unit of risk is taken to generate a particular return.
Quality over anything else
Investing in securities that appreciate exponentially in a short time-frame may turn out to be one of the riskiest things one may do. Investing in companies that promise quality and growth in the long run is the ideal approach. Quality investing aims to identify opportunities in profitable and cash generating businesses. In times of crises, investors look at individual businesses where one can trust the vision of the management and its execution capabilities.
Asset allocation is the key differentiator
Today, investors have a wide array of options at their disposal. We have seen the advent of innovative schemes that match various needs of the investors. Thus, in order to ensure maximum probability of meeting our goals, focus on ‘asset allocation’. Depending on your risk profile, investment objectives, corpus, age, etc., you need to decide the ratio of your exposure to equity, debt, hybrid and physical assets. Not only will it help you optimise returns but also minimise risk since different asset classes react differently across market cycles.
Investors need to understand that taking ownership of their investments is the most crucial thing.
The writer is chief business officer, Axis AMC.
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