Investors generally struggle with three questions.
"Where should I invest my money?"
"Why are my investments not performing?"
"How can I beat inflation on a consistent basis?"
The reason these issues crop up is mainly because most of us do not go through the process of analysing our investment needs in a proper manner.
There is general tendency to follow a haphazard approach to invesing.
Done rightly, investments should never be an issue.
i. Decide where to invest
Investing is a very simple process that requires planning, perseverance and time.
Here are some simple steps that will help determine an action plan.
1. List your goals.
2. Give each a tentative time frame.
For instance, a short-term goal may be buying a car, a medium-term goal to provide for your children's education while retirement planning would be the long-term term goal.
The time frame will tell you where to invest. Equities would be too risky if you have a very short-term period in mind but would do well for a long-term goal.
3. Assess your current financial position. This will help you determine how much can you save regularly and for how long.
4. Decide how much risk you are prepared to take.
If you want to take absolutely no risk at all, equity is out for you. Maybe, you prefer a bulk of your investments in fixed return instruments and just a small portion in equity.
Once you have answered the four points above, you will be able to determine how much should be invested in different asset classes such as equity (shares), debt (fixed return instruments) and other avenues (gold, real estate, art).
ii. Invest to beat inflation
Your prime objective should be to get the best returns from your savings by selecting the best possible investment options, given your time frame.
Many investors have the tendency to invest only in fixed return instruments. No doubt, these instruments offer some comfort; at the same time, they offer limited growth. At times, the returns on these investments are even less than the inflation rate.
Moreover, the returns from options like bank deposits, RBI bonds and small savings instruments are taxed, making the post tax returns even lower.
In other words, over a period of time the real rate of return (inflation - rate of return) becomes negative.
So, what is the best way to earn decent returns on your hard earned money? I think mutual funds are the answer.
They are easily one the best options available for investors in different segments, both in terms of potential to earn healthy returns as well as variety and flexibility.
Many investors have the misconception that mutual funds invest only in shares. The fact, however, is that mutual funds offer schemes to meet various objectives: growth of capital, regular income, tax savings, retirement planning and planning for your children's future.
Besides, they offer suitable options irrespective of whether your time frame is one day or one year. You can also select funds as per the asset allocation (how much should be invested in fixed return instruments and how much in equity) decided for you after taking into considering factors like risk profile, time horizon, investment objective and tax aspects.
The fact that mutual fund industry is a well regulated one should be an added comfort to the small investors.
The rules and regulations governing the industry are defined and monitored by the Securities and Exchange Board of India.
iii. Invest in instruments that suit your requirements
The problem with investors is that they tend to invest in any and every recommendation that comes their way.
Not only do the recommendations change frequently; following them blindly may throw your asset allocation out of gear.
A key factor to ensure success is to take help of a professional and qualified advisor who has the knowledge and expertise to offer you the best solution, both in terms of working out your investment plan as well as selecting the right options.
With a professional on your side, you can develop a portfolio that suits your needs.
A professional advisor will try and understand your requirements and you as a person and then offer solutions for achieving your investment objectives (both short-term and long-term) as well as enhancing your post tax returns.
However, it is equally important for you to spend time monitoring your portfolio and questioning your advisor.
If your investments are consistently losing money, ask for an explanation. If he recommends sticking with it, ask why.
If he suggests selling an investment, ask why. Ditto when he suggests buying one.
Whether or not you decide to opt for professional help, don't make the mistake of waiting. There are many investors who delay the process of investing either because they fear choosing a wrong investment option or think that they do not have enough money to start investing.
Remember, investing is a process, not a 'one time activity'.
By investing regularly over a period of time, one can build up capital as well as reduce the impact of short-term volatility made by one-time investments.
The author is CEO, Wiseinvest Advisors Pvt. Ltd, a mutual fund advisory firm.