Returns, returns, returns—past, present and future. That’s what most investors focus on. Whether it is on personal finance shows on TV or online, typical questions from investors are around past and expected returns. Participants at financial literacy sessions too are focused on tax deductions and returns. Meetings with potential clients initially revolve around the high returns of their portfolio and how I can beat the returns.
What they forget is that they are focussing on what they are up against and not what they can control. There is always some news such as oil prices, economic data, the local political situation and so on, which have a bearing on the markets but are not under our control. It is important to concentrate on what you can influence instead. After all, your focus determines your reality. Here’s what can you control in your investments.
A majority of investors just do investment planning and not financial planning. Investments are made based on the current market situation and not keeping in mind financial goals. Investors also do not realise that goals change over a period of time and one needs to have a portfolio aligned to life goals, which translate to financial goals. Indians tend to invest in equities, traditional insurance and real estate but when they have a requirement, they often find it difficult to redeem due to illiquidity or unfavourable market conditions. This can be avoided by goal-based investing, and for that one needs a financial plan.
Risk and returns
You can control your returns to an extent, provided you look into the risks involved in investing. I have met many who invest in market-linked debentures and are unaware that these structures are a way for non-banking finance companies (NBFCs) to raise fund to further lend for financing promoters and businesses like construction. They believe their funds are being invested into an index. By not reading the offer documents carefully, they are not taking into account the credit risk. Similarly, when people invest into non-convertible debentures (NCDs) or company deposits for returns, they are not controlling credit and liquidity risks. Liquidity risk or the inability to redeem at the time you require the money is present in investment-linked policies and real estate and it is in the investors’ hands to balance out their investments to take care of this risk. Choosing mutual funds based on recent past returns and not on goals and time horizon leads to wrong selection of funds which increases the risk in the portfolio. Also, investors do not have debt-oriented investments. This leaves them exposed to concentration risk which means more risk in their portfolio. Your portfolio risk is partially in your hands and you need to go beyond past returns and consider risks like liquidity and concentration risk to mitigate overall risk.
Costs and disciplined investing
A penny saved is a penny earned. The cost that you pay directly or indirectly affects your return. Investors don’t generally enquire about the costs associated with investments, if they are in-built. Only when they need to pay fees separately do they get concerned about the costs. With fees being charged, irrespective of fund performance, it is important to keep an eye on the costs.
The amount that you save and invest is completely under your control. However, investors are prone to taking impulsive decisions like stopping or exiting systematic investment plans (SIPs) when markets are down. To create wealth, being disciplined—which is investing regularly and holding for the long term—is important.
Your investment behaviour has a huge impact on your wealth. I see investors fretting all the time about the markets and the economy. This is because of constantly checking prices. Further, investors tend to favour schemes which provide tax deduction and forget about tax efficiency. Another common bias is towards guaranteed return schemes. A lot of times, investors don’t like mutual funds as they are subject to market risk. However, investors forget that other instruments like investment-linked policies and National Pension System (NPS) do not provide guaranteed returns either. Even fixed-return instruments such as Public Provident Fund (PPF) give market-linked returns as the PPF rate changes based on the movement of 10-year government bond. Investor behaviour, if controlled, has a positive impact on wealth creation.You have power over your mind and actions but not over outside events. Planning your investments based on the above factors increases the probability of investment success.
Photo Credit: iStock
Source: Article written by Mrin Agarwal in Livemint
Originally published on: 12 Aug 2019