Although, all this information may seem overwhelming to a new investor, one learns how to use them for keeping the portfolio on track to achieve your investment goals over different time horizons
Aristotle once said that well begun is half done. In other words, if you start off your investment process well, you are almost halfway to achieving your investment goals. While asset allocation determines your expected return and risk, the selection of fund is crucial in determining how you benefit from the true potential of the asset classes you invest in.
The key factors in the selection process are time horizon, that is, the period for which you intend to invest, your risk profile, your investment objectives and the type of investment strategy you follow. Some of us are naturally risk-averse and invest too conservatively, which impacts our ability to grow our savings and investments. The difference between a conservative and an aggressive investment approach relates to the proportions of the various instruments that you have in the portfolio.
A genuinely risk-averse investor generally has a heavy bias towards traditional fixed return instruments. However, if you are a conservative investor, you must consider various debt and debt-related funds that can yield higher returns without compromising liquidity and are more tax efficient.
If you want a balanced portfolio with exposure to both equity and debt, MF offer debt as well as equity-oriented hybrid schemes like equity savings, balanced advantage and equity oriented balanced funds.
If you are an aggressive investor, there are number of options available from MF. In addition to diversified equity funds, there are specialty and sector funds. If you have not invested in equity funds so far as they are perceived to be risky, think again. Although it is true that there are attendant risks of investing in equity funds, not investing in them can be even more risky for you as that can create a huge gap in the corpus you may require for your long-term goals and what you may end up accumulating. Before you begin investing in equity funds, you must know that equity investing requires time commitment and a discipline of investing regularly so that it becomes an on-going process rather than one-time activity. This will also help you benefit from the true potential of equity as an asset class.
While it is important to know your risk profile, there are few other aspects you need to be familiar with. For example, you must determine what your financial goals are. It is equally important to have a clearly defined time horizon. Do you need money in six months time or six years? The longer your time horizon, the more risk you may be able to take.
All these factors will have a direct impact on the fund you choose, as well as chances of achieving your goals. Always remember that your desire to take risk should not exceed your capacity to take risk. If you are willing to have a long-term view and wish to build a portfolio of equity funds, it would be wise to invest systematically over a period of time. This can not only help you reduce your anxiety about the current market level but also benefit from "cost averaging".
Also, even if you have made the right selection, monitoring the performance of funds in the portfolio remains one of the key factors. To do so, there are ample sources such as fact sheets, newsletters, websites and newspapers. These are provided by different sources like mutual funds, advisors, portals and agencies involved in MF analyses. Although, all this information may seem overwhelming to a new investor, one learns how to use them for keeping the portfolio on track to achieve your investment goals over different time horizons.
The writer is CEO, Wiseinvest Advisors
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