Mutual Fund Investment Choices based on various factors
Investment choices are fundamental to our goals. The choices we make determine where our hard earned money has to be invested. The results are reaped after a period of time, when the investment has procured the desired returns. When we hear the term investment choices we are bound to think ;
• Mutual Funds
• Debt investments
• Gold Property
• Fixed income instruments
When we are ordering in a restaurant we are presented with an array of choices between vegetarian and non vegetarian main course, the side dish, the beverages we want. We change any one of the components in Our selection the ultimate bill amount is affected. Creating a portfolio based on Our investment appetite is a similar process. As an investor we have to understand the extent of risk we are willing to take and an assessment of how will we deal with bad losses, if there is any. A realistic assessment of returns Our portfolio could possibly generate and whether it is in sync with Our expectations. At last liquidity, where we decide for how long we are willing to lock away Our money and whether it will be a beneficial move for Our ultimate goals. An eclectic mix of these three elements constitutes Our investment appetite. The decisions we make on the basis of these aspects ultimately determine Our portfolio returns. Even if we change one aspect of any of these investments the ultimate return is altered. Is it not like ordering pizza online?
Risk: How Far It Takes us
Risk predominantly has a negative connotation. Investors have a tendency to avoid products which have the tag of being risky. Risk is associated with loss. Hence, a risky product is the one where we stand to lose much more than we gain. These are the usual views of risk, one of loss and avoidance. So after such a negative picture has been painted the question is how much risk should an investor take?
Risk could also be viewed in a different light where risk is inseparable from performance. In some cases taking a risk is necessary to gain the returns. The extent of risk as an investor we are willing to take depends on Our financial status and psychological comfort with the prospect of uncertainty and incurring short term losses for long term gains. The risk is often measured in relative terms through benchmarks. The riskier an investment scheme is supposed to be, it is also expected to surpass the category benchmark substantially. The historical returns of a risky scheme are where the investor draws comfort from while investing in present. Through the investing world one aspect is always emphasized on calculated risk in the present always pays off in the future. However, to be able to take such risks one has to overlook minor short term losses or volatility in the market. Risk could be as less as zero like the fixed income instruments such as fixed deposits and Public Provident Funds where there is guaranteed returns at negligible risk. However, the downfall occurs in terms of inflation adjusted returns. The returns are not enough to outdo the inflation or the rate of return is equal to that of the rate of rising inflation. Equity investing is associated with a moderate to very high degree risk. However, they provide inflation adjusted returns. There could be short term losses but certain equity classes have generated long term returns which are far superior to other asset classes like, Gold, Property, Fixed income products etc. Let us see how equity Mutual funds in different categories have often generated returns beating the inflation.
As an investor while we are making various investment choices Our personal risk appetite plays an important role in ascertaining the asset classes we invest in. The choice is not just about specific funds but also are we exposing Our funds to enough risk to generate the returns because the higher the risk, the tendency to generate returns is higher as the investors also have to be compensated for being able to take a certain amount of risk.
Returns: How Much is Enough
Returns and risk is intertwined. It is often see the higher the risk an investor takes, they reap better returns. The question we need to ask while investing is, how much return is enough and depending on that we expose Our portfolio to risk. Returns are also determined by time factor. The period of investment determines the compounding effect on a certain investment. So an investment of 2000 per month for the next forty years invested through Systematic Investment Planning (SIP) is going to fetch we higher returns than 30,000 per month invested for only five years. Returns are often not determined by the amount we invest. Rather, the time period for which we invest and instrument in which it is invested.
The returns that we expect Our portfolio to generate should ideally be aligned to Our financial goals and the time period of their fulfillment. The risk and returns and the time period all have to align for the fulfillment of a goal. For example, if we are aged 35 presently, we have a period of 25 years to invest for retirement. Since we have a long time period by Our side we can take high risk as short term losses may turn into long term gains. However, if we are in need of a corpus in the next three to five years then we need to invest in an instrument which has historic records of generating substantiate returns within a time period of three to five years. Equity Linked Savings
Scheme are a good example where a lock in period of three years exist and usually generates inflation adjusted returns within a period of three to five years.
Liquidity: Far Away or Close Enough
Liquidity is simply ascertaining how easily we wish to access Our money without losing much of it in exit loads and payment of taxes. Certain investment instruments have strict norms about liquidity where the invested amount cannot be accessed for a fixed period of time. Usually fixed income instruments come with a fixed time period of investment. Public Provident Fund has a fixed investment period of fifteen years; National Pension Scheme has a fixed investment period till the investor turns 60 years. So while the fixed income instruments keep providing steady returns they are not liquid in nature. Hence, as investor we are sure we are setting aside investments for a certain purpose then fixed income instruments could be ideal. However, if we require quick returns and liquidity, liquid funds could be a good option where investors can invest for as less as even one month and keep generating returns instead of the money lying stagnant in bank accounts. Hence, investors also have to make the crucial choice of liquidity.