We are all into the DIY – including making our financial decisions. Having said that, the Do It Yourself or DIY investment approach can be enticing for a newbie investor for various reasons.
Chintan Haria, Head – Product Development and Strategy, ICICI Prudential AMC, says, “When it comes to asset allocation, the typical approach would be – After all, isn’t it all about investing in equities and a few more asset classes, how difficult can it be?
“However, with time, it soon becomes apparent that juggling profitably between various asset classes is no easy task,” adds Haria.
Here are some of the most common challenges faced by DIY investors;
Stock selection: How should a first-time investor go about selecting stocks and diversifying optimally? While there are various sources of information available online, it is difficult to filter the actual signals from all the accompanying noise. Haria explains, “While starting if you do not have proper guidance or understanding, you are bound to end up making uninformed choices leading to some costly mistakes.”
Timing the market: Experts say even experienced investors find it difficult to time the market. “A newbie may think that all the information points in a certain direction and may end up making an investment which over time could prove to be erroneous,” says Haria.
Figuring out the market cycle comes with experience. To achieve this level of knowledge, he adds, “it is imperative to invest a considerable amount of time learning about markets and how it reacts to various circumstances. Since all of this is not possible for a lay investor, a newbie tends to rely on the herd or noise leading to loss-making decisions.”
Behavioural biases: What happens when you invest in the stock market and see your shares turn red? Most of us will be prompted to cut our losses and sell at a lower price. Various biases like fear, greed, and caution colour our investment approaches, setting us up to our investments for failure in the long run.
Considering all these aspects, experts say one of the easiest ways to address and overcome all of these challenges and yet build a robust portfolio can be through investing in a passively managed multi-asset fund. Apart from getting an in-built asset allocation done, one can also benefit from optimal risk-adjusted returns.
Going Passive: Industry experts say passive investing is one of the best options for investors who do not wish to get caught up in the ebbs and flows of the market. Haria explains, “Passive funds track the underlying index or basket of securities and aim to generate returns in line with the market. Considering that the main aim of these funds is to replicate the index, they tend to witness minimal churn.”
Further, experts say, fund managers do not need to actively manage a portfolio. Due to these two factors, the management fee charged by passive funds is usually relatively lower. Passive investing allows investors to participate in the growth of the market without worrying about the variables, making it a win-win solution for DIY investors.
Haria adds, “The scheme offers the ease of DIY investing while getting the benefit of expert fund managers optimising the portfolio for positive investment outcomes at all times.”