How to choose the right investment vehicles: here’s what will guide you through the ups and downs of the market

The long-term outlook for domestic investors looks promising given the multitude of reforms the government is implementing, GST being probably the most important.

The world of investing is becoming increasingly complex and it is impossible for investors to track and understand the multiple global and national factors that are at play. Be it global bond yields, currency movements , cash flow, PSU bank write-offs, delayed earnings recoupment or crude oil price volatility, there are enough risks floating around. However, the long-term outlook for domestic investors looks promising given the multitude of reforms the government is implementing, GST being probably the most important.

In fixed income, investors have earned “above normal” returns over the past several years thanks to capital gains from falling interest rates. With the cycle of lower rates perhaps coming to an end, investors need to get used to cutting yields on their bond investments and not compromising credit quality in their quest for a higher yield.

So how are investors navigating this journey? Here are a few simple steps.

Have a long-term horizon

Time, which is supposed to heal wounds, will also help you weather volatility and correct investment mistakes. Ideally, investors who understand the power of compounding end up getting seriously rich over a period of time. Very importantly, tax efficiency comes into play when invested for the long term. If you look at the performance of the stock and bond markets over long periods of time, the capital risk drops dramatically.

Understanding Risk Tolerance

An important part of investing, your risk appetite to withstand large market swings, needs to be understood. If in doubt, there are many online tools available to guide you. This exercise, while not foolproof, will help you prudently allocate capital that may be at risk. Over the long term, any hedge against sharp market declines is good asset allocation.

Set investment goals

The idea is to do something meaningful and not leave your finances to chance. Short and long term goals will give you direction and keep you focused. To be realistic. Ultimately, you need to set goals to achieve your goals.

Don’t take undue risks

In India, many investors continue to seek strong returns after seeing strong market returns over the past couple of years. In the aspiration for yield, investors are betting on unknown small and mid caps, hot IPOs, turnaround companies with weak balance sheets. Eventually, these would prove to be recipes for disaster. Higher risk does not translate into higher returns. Although it is not easy, the trick would be to balance the risks with the returns.

Building a cat safely

To weather the tough times, investors would be better off setting aside a body of fixed-income securities along with tax-exempt bonds and high-quality debt securities. The idea here is not to maximize returns, but to ensure that your lifestyle is not impacted and allows you to rest easy even if the world around you is falling apart. Apart from any emergency, this swimming pool must not be exploited.

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Portfolio Simplicity Approach

Although there are many exotic investments, the simplicity of your entire portfolio will make it extremely efficient and powerful. As an investor, you would need a window to exit in the event of underperformance or an unexpected requirement. Lock-in options take away the flexibility and add no benefit, either from a return or tax point of view. Choosing the right investment vehicles is key and therefore a basket portfolio with a mix of high quality mutual funds with proven track records, listed stocks if you have a hankering and tax exempt bonds will guide you through the ups and downs of the market.

Low wallet costs

As the markets became efficient, the incremental returns relative to Nifty/Sensex gradually declined. However, when it comes to wallet costs, you don’t see any significant drop. High costs will eat away at a significant portion of returns. Focus on this aspect when investing, it will add value to your kitty over time.

The author, Ramesh Bukka is Director and Co-Founder, Entrust Family Office Investment Advisors


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