Before chasing new investments, ask yourself these six questions

Over the last few months, there have been many queries on SIFs (specialized investment funds) and GIFT City investments. Some of these enquiries have been led by genuine investor interest, but more so by the feeling that these new and exclusive products, available to people who can commit over ₹10 lakhs, can make better returns compared with regular mutual funds. Investor inflows growing by 200% in SIFs and by 68% in GIFT City registered users in this financial year corroborate this.

The psychology of novelty and narratives built around a product often trigger investors to take these bets. Whether it is cryptocurrencies, unlisted stocks or stock baskets, the appeal of trying something new, being among the first to invest and gaining access to an opportunity that others may not have discovered yet can be a powerful driver. It can overshadow the more important question: what role does this investment have in my financial life?

Instead of evaluating the role of a product solely on the basis of expected returns, here are a few questions investors need to ask themselves before choosing any product or scheme.

Firstly, what can go wrong, or what is the risk in the product?

For example, investors have been piling into lowest-rated corporate bonds, ignoring the default risk. Investors who had blindly invested in cryptocurrencies did not anticipate hacking incidents. Investors must understand in depth how the product works and the risks that could arise, and evaluate if they are in line with their risk-taking capacity.

Secondly, where does this product fit in the portfolio? Does one use it for a core goal or as a tactical allocation?

If it is meant to be a core holding, can one really trust this product now for the long term? If it is a tactical call, can one afford losses? SIFs are one such product where investors need to assess all the above.

Thirdly, does the product add something that one does not already have in their portfolio? In other words, is it helping one diversify or increasing exposure to existing holdings?

For example, a midcap-oriented stock basket may have high overlap with midcap funds, in which case, it doesn’t really provide diversification.

Fourth, does the expected return beat inflation on a post-expense, post-tax basis, and does it beat existing investments by a good margin?

It has been noted that some PMS/AIFs’ post-tax returns hardly beat mutual fund returns by 1-2% per annum in which case, is it really worth taking the extra risk and costs?

Fifth, what are the costs and how easy is it to get back one’s capital?

With unlisted stocks, there is no transparent price discovery and liquidity is low. Hence, this exposure increases the (non-direct) costs and illiquidity in the portfolio, not something any investor would desire.

Finally, is the taxation on the investment simple?

Those wanting to take international exposure through GIFT City should note that non-MF investments done through GIFT City are treated as foreign investments and need Schedule FA and other foreign asset reporting in the ITR.

Is the amount being invested really worth adding complications in the ITR and facing the repercussions of not following FEMA rules?

In the quest for better and possibly quick returns, investors are turning to new options but tend to miss out on basic checks. But, for most investors, a simple portfolio with a combination of broad-based mutual funds and NPS would work well for the long term. Even with these core investments, one must check all the above points to ensure a well-diversified portfolio in line with goals.

Newer investments should be tracked for a few years before investing. Further, these are more of tactical and unique investments and one must have the ability to accept volatility or negative returns.

The key is to find a few outstanding investments rather than going after everything trending.

Mrin Agarwal is a financial educator & CEO of Finsafe India Pvt., a workplace financial wellbeing company.