In the ever-evolving world of investments, some principles stand the test of time. Here are five such principles from the book, Five Timeless Rules For Mutual Fund Investors by Nilanjan Dey, which talks of the foundations of success for mutual fund investors. These timeless rules can help you maximise returns and minimise losses.
A modern investor knows his own risk appetite and risk tolerance level like no one else does. The investment strategy he will ultimately follow must be based on his objectives, time horizon and tolerance levels. Identify yourself. Ask whether you are a conservative investor. Or whether you are an aggressive participant. That will lead you to the right asset allocation.
This typically will involve allocating your investments across different asset classes. Aim at creating an ideal mix of equity, debt, gold, real estate and alternative investments in proportions that make sense for your financial situation. Regularly rebalance your portfolio to maintain the desired asset allocation as market conditions change.
Determine the right mix of asset classes (e.g. stocks, bonds, real estate, gold, cash) that align with your financial goals and risk
tolerance. Asset allocation is said to be the most critical driver of portfolio performance.
Diversification involves spreading your investments across different asset classes, industries, investment styles and even geographical regions in order to reduce risk. When you put all your money into a single investment or asset class, you are exposed to the specific risks associated with that investment. If it performs poorly, your entire portfolio suffers.
It is neither practical nor advisable to have an unmanageable portfolio. A portfolio of ten funds may be just tolerable, but a portfolio of twenty-five? No, that is a daunting number. It is simply not feasible to manage such a huge number of funds
Investing with a long-term horizon allows you to ride out market fluctuations and benefit from the power of compounding returns over time. Avoid making hasty decisions based on short term market movements.
Market timing is an investment strategy where an investor attempts to buy and sell assets, based on predictions about future market movements. The goal is to enter the market at low points (buying) and exit at high points (selling), with the aim of maximizing returns and avoiding losses. However, market timing is a challenging and risky approach for several reasons:
Attempting to time the market by making frequent and speculative trades can lead to high risk. Predicting market movements is challenging and mistimed trades can result in significant losses.
Market timing may lead to missed investment opportunities, as investors often wait for a perceived "ideal" moment to buy or sell. This can result in sitting on the sidelines during periods of market growth.
Consistently adding to your investments through regular contributions, such as automated contributions to build your retirement corpus, can help you benefit from Rupee Cost Averaging. RCA is the cornerstone of compounding. Any mutual fund investor will be aware of SIPs or systematic investment plans. RCA needs to be appreciated in view of the efficiency it contains, in light of the convenience it offers. Allocate certain fixed amounts in multiple funds across timelines and market cycles. Your average cost of holding will reduce.
You will naturally need to review your holdings. Which of my funds have done well, and which have not, is as always the primary question to ask in this context. Review, should be conducted in a dispassionate, systematic and fair manner. And you may want to have your own rules and standards for the purpose of reviewing and monitoring.
Spend some time each month to learn the latest on your funds. There are calculators and other handy solutions (even for some of the most serious problems). Do use them as extensively as possible. Quality research will help you understand the investments you are considering. This includes analysing financial statements and evaluating the competitive landscape. Besides this, please avoid investing purely on the basis of emotions. Remember, emotional decisions are usually driven by fear or greed. These can lead to poor investment choices. Stick to your investment plan and avoid making impulsive decisions based on market sentiment.
The author is director, Wishlist Capital Advisors