It's interesting how the investment scenario has radically changed over the last year or so. Then, several risk-averse investors were investing in high risk investment avenues; now, investors who have the ability to take on risk are shunning market-linked instruments in favour of assured return avenues. We present a 5-step strategy that will help investors tide over the testing investment scenario.
Don't panic and fall prey to herd mentality
To begin with, investors would do well not to panic and end up making ill-informed investment decisions. For instance, in testing times like these, investors can easily fall prey to the 'herd mentality'. The thinking is - if everyone else is doing it, it must be the right thing to do.
At Personalfn, we have in recent times met several investors who discontinued their ongoing systematic investment plan investments; others chose to liquidate a better portion of their mutual fund portfolio at a loss and invest in fixed deposits. More often than not, the reason for this course of action was that a colleague, friend or relative was doing so.
Investors must remember that investing is a personalised activity. A 'one size fits all' approach shouldn't be adopted. Just because a certain course of action may be right for an individual, it need not be apt for another. Each investor has a unique set of needs and objectives; his investment portfolio and decisions must be in line with the same.
Consider the above example of discontinuing an SIP. So long as the fund is right for the investor i.e. he can take on the risk associated with the fund and the latter can help the investor achieve his investment goals, there is no need to discontinue an SIP. In fact, in volatile market conditions, the benefits of an SIP i.e. lowering the average purchase cost kick in. Also the power of compounding further necessitates staying invested for the long-term.
Review the investment portfolio
Now is a good time for investors to review their portfolios. Investors who find their portfolios dominated by just a single asset class like equities, debt, gold or property shouldn't be surprised if their portfolios have failed to deliver over longer time frames.
Studies have shown that asset allocation is responsible for a significant portion of the variance in portfolio returns. Over the last few years, when equity markets rose in an almost secular manner, several investors have been guilty of holding portfolios skewed in favour of just equities. Now is a good time to revisit the principles of asset allocation.
Also within each asset class, investors must ensure that the chosen avenues are right for them. For instance, while investing in equities, investors can either make direct investments or opt for the mutual funds route. Direct equity investing is a full time activity and requires access to research and understanding of a number of areas (companies, sectors and economy, among others). Clearly, this can be an arduous task for most retail investors.
Conversely, in the mutual funds route, the onus of making investment decisions is shifted to the fund management team for a cost in the form of loads and management fees. Investors must decide on which avenue is suited for them and (where required) make necessary changes to their portfolios. Finally, it is vital that the portfolio should be equipped to aid investors achieve their financial goals.
Create a contingency reserve
Any financial planner worth his salt will vouch for the importance of having a contingency reserve on hand. The same will help investors meet expenditure arising from unforeseen events like a medical emergency. Also with downsizing emerging as a distinct possibility, providing for a temporary loss of income is pertinent. Investors must work towards creating a contingency reserve. The exercise is a simple one.
All they need to do is decide on the amount required to meet their ongoing monthly expenses and the period for which they wish to provide for. The requisite sum should be held in low-risk and liquid avenues like savings bank accounts, cash, well-managed liquid funds and short-term bank fixed deposits.
Evaluate the investment advisor
At Personalfn, we have always maintained that an investment advisor's core responsibility is to offer competent and unbiased advice. While aspects like prompt service and a range of offerings are also important, they do not command precedence over advice. Some time back when the economy was booming and stock markets were at an all-time high, being an investment advisor was easy. The mantra was - take on high risk and clock superior growth.
But now the tide has turned and how! Advisors who offered their clients inaccurate and biased (read brokerage inspired) recommendations are running for cover. Now is the time for investors to test the mettle of their advisors. Investors must recall if their advisors aggressively recommend equity investments in rising markets or urged them to adhere to their asset allocation? Also, was the advice to take on higher risk to clock higher returns or was it to invest in line with their risk appetite. If on both counts, the advisor recommended the former, there is a case for reconsidering the association with him.
Commence the tax-planning exercise
We are well into the tax-planning season. Investors who haven't started the tax-planning exercise as yet, should begin now. Apart from minimising the tax liability, investments made for tax-planning also aid in wealth creation. And that should act as motivation to get started at the earliest. Of course, a fair bit of thought needs to be invested in the activity. Hence, it is necessary to evaluate various options, construct an investment plan and then invest in line with the same.
Investors can choose between conventional assured return avenues (Public Provident Fund, National Savings Certificate, 5-Yr bank fixed deposits, among others) and market-linked ones i.e. tax-saving funds (ELSS) and unit linked investment plans (ULIPs). The key lies in selecting avenues that are right for the investor. This is important since tax-planning forms a part of the investor's broader financial planning exercise.
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