The world of investing is getting increasingly complex and it is impossible for investors to track and comprehend multiple global and domestic factors that are at play. Be it global bond yields, currency movements, liquidity flows, write-offs in PSU banks, delay in earnings recovery or volatile crude oil prices, there are enough risks floating around. However, the long-term outlook for domestic investors appears bright given the host of reforms that the government is implementing, with GST being probably the most significant one.
In fixed income, investors have made ‘higher than normal’ returns over the last few years from capital gains emanating from falling interest rates. With the rate cut cycle possibly coming to an end, investors need to get used to lower yields from their debt investments and not compromise credit quality in the quest for higher yield
So how do investors navigate this journey? Here are a few simple steps.
Have a long-term horizon
Time, which is supposed to heal wounds, will also help you to ride through the volatility and correct investment mistakes. Ideally, investors who understand the power of compounding end up making serious wealth over a period of time. Very importantly, tax efficiency kicks in when invested for the long term. If you look at performance of equity and bond markets over long periods, risk of capital reduces significantly.
Understand risk tolerance
An important element of investing, your risk appetite to withstand large market swings, needs to be understood. In case you are not sure, there are a host of online tools available to guide you. This exercise, though not foolproof, will help you prudently allocate the capital that can be at risk. Over the long term, any hedge to sharp market falls is proper asset allocation.
Frame investment goals
The idea is to do something meaningful and not leave your finances to chance. Short term and long term goals will give you direction and keep you focused. Be realistic. Ultimately, you need to make goals to meet goals.
Don’t take undue risks
In India, many investors continue to hunt for robust returns after getting strong market returns over the last two years. In the yearn for yield, investors are betting on unknown small and mid-cap companies, hot IPOs, turnaround companies with weak balance sheets. Eventually, these would turn out to be recipes for disaster. Higher risk doesn’t translate into higher returns. Though not easy, the trick would be in balancing risks with returns.
Build a safe kitty
To tide over tough times, investors are better off setting aside a fixed income corpus with tax-free bonds and high quality debt instruments. The idea here is not to maximise returns but ensure your lifestyle does not get impacted and allows you to sleep easy even if the world around you is crashing. Apart from any emergencies, this pool should not be tapped into.
Portfolio simplicity approach
While there are plenty of exotic investments that are bandied around, keeping your entire portfolio simple will make it extremely efficient and powerful. As an investor, you would need a window to exit if there is under-performance or an unforeseen requirement. Lock-in options take away the leeway and do not add any upside, neither from returns nor from a tax perspective. Choosing the right investment vehicles are critical and therefore a basket portfolio with a mix of high quality mutual funds with proven track record, listed stocks if you have a penchant and tax-free bonds will take you through market optimisms and declines.
Low portfolio costs
With markets getting efficient, incremental returns over Nifty/Sensex have been gradually reducing. However, on the portfolio costs front, you do not see any meaningful declines. High costs will eat away a significant part of returns. Focus on this aspect at the time of investing, it will enhance your kitty over time.
The author, Ramesh Bukka is director and co-founder, Entrust Family Office Investment Advisors