When investing, it is important to remember that there is no one single product that will provide the ‘best returns’ consistently. Different products suit different objectives, needs and time horizons. For example, an equity mutual fund invests primarily in shares and is a great wealth builder, but not with certainty- it can under the right conditions generate tremendous returns in 6 months time, and at other times it requires a longer time period to maximize returns. This is why an equity fund is best suited to those goals with a medium to longer time horizon, such as funding a child’s education or creating a retirement fund.
Just like products, even investors are different and have different risk profiles. In fact, there are many factors that an individual has to consider while investing like time horizon, life goals, mindset and so on. Even after identifying the suitable product on the basis of these parameters, volatility can affect investor sentiment and hence, investment choices. For example, a sudden fall in share prices might make investors panic into selling. However, external shocks can be mitigated if investors have a portfolio with the right selection of assets- a portfolio which has been balanced or diversified appropriately to be able to handle volatility and optimize returns over the long term.
Your financial goals are key…
The smartest investors realize that the key is not what one product will give you the best return, but how to go about building an investment portfolio that helps you reach your goals while managing risk appropriately.
When you start investing, of course you want to know that you or your advisor will choose the investment with the best return potential. If you invest in a tried and tested product with a good track record in the last year, you will obviously make a profit, won’t you? Unfortunately, investing isn’t always like that. What goes up, can come down and vice versa. One of the reasons you should take a long-term view of investing is that many investment products, on account of being linked to market movements, experience fluctuations in price. This is called volatility.
In fact, different products over different periods of time can give you higher returns. Over most periods of time, equities beat bonds, while on certain other occasions, the reverse happens. During times of economic uncertainty, even gold can act as an effective hedge and generate positive returns compared to other instruments.
Deciding which investment product is best suited to you, and can provide optimum returns, is based on your financial goals and risk profile. The clearer your goals are, with specific time periods attached to each, the better your investment choices will be.
… but don’t forget inflation!
Don’t forget that your investments should provide returns that are higher than the inflation rate. To do that, you will need a diversified portfolio, which might include savings, some property and also mutual funds containing a mix of equities and bonds.
Sound investments need regular monitoring of the market. A professional financial advisor could not only help you create a balanced portfolio using some of the guidelines above, but also monitor your investments for you. A good advisor will generally spend time right at the beginning in helping you identify the right choices for the long term, and will discourage you from changing your investment choices frequently. In fact, frequent buying and selling may also attract higher fees.
1.Identify your financial goals to figure out the best suited product, or a combination of investment products.
2. Calculate the amount you need to invest. The more you invest, the faster you’ll move towards your goal.
3. Diversify your investments suitably to manage risk well.
4. Take good decisions and stay invested for the long term.