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How to set your investment process right

Choosing the right investment options and adopting an ideal investment strategy can be quite challenging for investors.  They often face the dilemma of how to do this effectively. If you one of those investors who is looking to set your investment process right, here's what you need to do:

Hemant Rustagi        Last Updated: April 30, 2014  | 10:00 IST

Hemant Rustagi
Hemant Rustagi
Today, investors have a number of investment options to choose from. While on the one hand there are traditional investment options like fixed deposits, bonds, debentures and small savings schemes, on the other there are market linked products like mutual funds, ULIPs, structured products and stocks. Needless to say, there are pros and cons of investing in both categories of investment options. For example, most traditional investment options offer guaranteed returns and safety of capital but the returns are not tax efficient. Similarly, market linked products provide investors with an opportunity to earn higher returns than traditional options but expose them to the risk of volatility. Market linked products also score over their traditional counterparts in terms of tax efficiency.

Therefore, the key to investment success is to choose the right options and invest in them in the right proportion. Some of the other key ingredients for achieving investment success are following a disciplined approach and having a defined time horizon. It is important for investors to understand that putting money aside for investment itself can go a long way in achieving their investment goals. Besides, by following a disciplined approach to investing, one can keep emotions out of one's investment process.

However, choosing the right investment options and adopting an ideal investment strategy can be quite challenging for investors.  They often face the dilemma of how to do this effectively. The anxieties arising out of uncertainties surrounding the financial markets too affect their decision making process.  

Investors will do well to know that investing is a simple process that requires planning, perseverance and time. While a professional investment advisor can help them in their planning process, they themselves have an important role to play in defining the time horizon and remaining committed to it.

If you one of those investors who is looking to set your investment process right, here's what you need to do:

Plan your investments  

Investing in a haphazard manner can put your hard earned money to risk and make you compromise on some of the most important investment goals of your life. Therefore, you must plan your investments as it would keep you disciplined and focused on your investment goals. Besides, a carefully designed asset allocation strategy and the process of rebalancing it from to time will ensure that you remain invested in originally selected asset classes at all times.  It will also help you in tackling bull and bear markets without letting the "greed and fear" factors affect your mindset. Remember, to benefit from power of compounding, you must begin investing as early as possible. Many of us do not even start our investment process either for the fear of choosing a wrong investment option or thinking that they we do not have enough money. Since investing is a continuous process, you can begin even if you don't have a lump sum amount to start with.  

Understand risk and reward

Every investment option has attendant risks. Therefore, you must maintain a balance between risk and reward. To ensure this, the key is not to underestimate risk and/or overestimate returns. In other words, you must understand the potential and the risks associated with different asset classes in your portfolio.  This helps in avoiding disappointments, and the consequent panic reactions that may derail your investment process.

Keep your focus on long-term goals

It is always challenging to achieve long-term goals as they require us to accumulate a large corpus and stay disciplined for longer periods. However, quite often we lose sight of our long-term goals when we spot an opportunity to earn some short term gains. For example, when the stock market turns turbulent, it can be quite tempting to pull money out of equities and invest it in debt instruments. However, more often than not, we fail to reinvest the money in the stock market and hence we lose out on attractive returns that equity offer over the longer term. Similarly, a rising stock market may tempt you to pull money out of debt and invest it in equities to make a quick buck. This could result in you either losing a part of your investments or earning low returns. Remember, timing the market is a strategy that even experts find it difficult to implement successfully. Therefore, you must keep your focus on your long-term goals and continue your investment process through your time defined time horizon.

Invest in tax -efficient investment options  

While paying taxes when necessary is understandable, paying more taxes than necessary is not! Therefore, ensuring that your portfolio has the utmost tax efficiency is one of the key factors that can help you in improving your portfolio returns. While it is true that tax efficiency of the instruments alone cannot guarantee success, a tax aware investment strategy can make a substantial difference to what you get to keep in the end.   

Remember, tax efficiency is important for both short term as well as long-term investing. For example, investing in debt funds as against traditional options can make a huge difference to you post tax returns, especially if you are in the higher tax slabs. Long-term capital gains i.e. gains on units sold after completion of one year or more are tax at a concessional tax rate of 10 percent in debt funds. Tax efficiency becomes even more important when you plan for your medium and/or long-term investment goals such as children's education, buying a house and retirement planning.  To achieve these very important goals of your lives, it is essential to invest in options that have the potential to provide higher as well as tax-efficient returns. This factor is very important especially considering the escalating costs. That's why equity has an important role to play while designing a portfolio for long-term goals. Remember, investing to beat inflation generally involves steering clear of tax-inefficient instruments.

The author is CEO, Wiseinvest Advisors

 

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