The Indian financial markets are in a sweet spot — this phrase has by now become so overused that it’s time investors actually move beyond it.
With Sensex delivering 30% return in 2014, it seems making money in equity is the easiest thing. Even equity assets under management (AUM) of mutual fund houses are touching new highs every month.
In investments, instant gratification is more of a norm and delayed gratification has become an aberration. In fact, the famous Stanford marshmallow test conducted for the first time in the sixties had proved that people who delay the gratification are typically more successful in all spheres of life, including investing. So, what should you do or not do as an investor?
Keeping it simple is the most complex thing. Chasing returns is what a majority of us like to do. We look at returns rather than the time-period.
Decisions based on price rather than fundamentals could work in the short run. In the long run, though, you need to have a very clear strategy on income generation and wealth creation. As an investor, once you have clarity on these elements, investing becomes very simple, irrespective of whether the markets are in a bullish or bearish phase.
Power of compounding
Here are a few elements that you should keep in mind to ensure that you create wealth and there is regular cashflow for your day-to-day needs.
First, identify your regular income needs and liquidity; if the investment horizon is less than 3-5 years, invest in debt mutual funds with growth option.
If the investment horizon is greater than five years, go in for equity mutual funds (direct equity can be considered if you can keep track and monitor the companies). Do not have more than a total of four funds — both equity and debt funds — and, always remember, investing in multiple schemes is not diversification.
Monitor your portfolio every six months; try to control what you can, and not what you cannot. Maintain a diary of your investment thoughts and compare them with the subsequent outcome. In the process, you will become a better investor.
Always believe in your actions and remember the golden rule in investing — patience pays in wealth creation.
Creating wealth is more of a function of inaction at your end. Do not be enamored by the ‘get rich quick’ phenomenon as you will lose more that way. As the power of compounding works best in the long run, give emphasis on time horizon rather than return expectations. You need to develop your emotional quotient to filter out the noises around you and create wealth. With inflation trending down and interest rates likely to fall, you should not miss this opportunity.
In all kinds of markets, it is important to note that investing has to be process-oriented. There is no ‘right’ method or holy grail for investing. Execute the process and give time for your investments to grow.
By Brijesh Damodaran
The writer is managing partner of BellWether Advisors LLP