Keep Your In­vest­ment Process On Track

Dalal Street Investment Journal - - EXPERT SPEAK -

Awell-planned in­vest­ment process goes a long way in al­low­ing in­vestors to achieve their goals over var­ied time hori­zons. How­ever, keep­ing in­vest­ment process on track can be a tough task as one has to face nu­mer­ous chal­lenges, start­ing from the stage of de­cid­ing as­set al­lo­ca­tion and con­tinue through the en­tire time hori­zon. While the as­set al­lo­ca­tion de­ter­mines the po­ten­tial re­turns and the at­ten­dant risks, the de­ci­sions on re­bal­anc­ing and mon­i­tor­ing the port­fo­lio are cru­cial from the point of view of keep­ing the port­fo­lio on track. The level of in­vest­ment suc­cess de­pends upon how an in­vestor han­dles these chal­lenges. Here are a few tips on how you can tackle these chal­lenges:


One of the most cru­cial fac­tors that de­ter­mine the level of in­vest­ment suc­cess you can achieve is ef­fec­tive bal­anc­ing of risk and re­ward. There­fore, the fo­cus should be iden­ti­fy­ing your risk tol­er­ance level and de­cid­ing a suit­able as­set al­lo­ca­tion. The right way to de­cide as­set al­lo­ca­tion is by align­ing it with your time hori­zon. For ex­am­ple, eq­uity funds re­quire you to have risk ap­petite to with­stand mar­ket volatil­ity as well as long-term time hori­zon. There­fore, eq­uity should be the main­stay of your port­fo­lio while in­vest­ing for long-term goals like build­ing a corpus for chil­dren’s ed­u­ca­tion and re­tire­ment plan­ning. How­ever, as you get closer to the com­ple­tion of time hori­zon, re­bal­ance your port­fo­lio grad­u­ally to pro­tect gains as well as make it suit­able for the changed role, i.e., from ac­cu­mu­la­tion to dis­bur­sal. Keep your port­fo­lio com­pact

Mon­i­tor­ing the progress of the port­fo­lio is as im­por­tant as mak­ing the right se­lec­tion. There­fore, you must build a com­pact port­fo­lio with­out com­pro­mis­ing the level of di­ver­si­fi­ca­tion. Mu­tual funds are an ef­fec­tive way of achiev­ing the right level of di­ver­si­fi­ca­tion by in­vest­ing in care­fully se­lected funds. Re­mem­ber, over-di­ver­si­fi­ca­tion is gen­er­ally the re­sult of fol­low­ing a hap­haz­ard ap­proach.


While the volatil­ity is a nat­u­ral phe­nom­e­non in the mar­ket­place, it is im­por­tant not to al­low it to in­flu­ence your long-term in­vest­ment strat­egy.

For ex­am­ple, a fall­ing mar­ket may tempt you to ei­ther in­vest ag­gres­sively or aban­don an as­set class like eq­uity com­pletely. Re­mem­ber, both these ex­treme re­ac­tions can jeop­ar­dize your fi­nan­cial fu­ture.

While a dis­ci­plined ap­proach is the per­fect way to ben­e­fit from eq­uity or eq­uity-re­lated in­vest­ments, a hap­haz­ard ap­proach to re­align the port­fo­lio amidst short-term volatil­ity is most likely to back­fire. More­over, when you make an at­tempt to speed up the process of re­cov­er­ing losses in the port­fo­lio by in­vest­ing short-term sur­plus money, the re­sult may not be in line with your ex­pec­ta­tions. How­ever, over the long-term, the short-term fluc­tu­a­tions tend to smooth out.

It is also im­por­tant to an­a­lyze the per­for­mance of the funds prop­erly to avoid mak­ing any abrupt de­ci­sion. The right way is to an­a­lyze their per­for­mances vis-a-vis the bench­marks and the peer group. Re­mem­ber, even the most con­sis­tent fund man­agers are likely to de­liver neg­a­tive re­turns when the mar­kets cor­rect. There­fore, short-term neg­a­tive re­turns, in line with the mar­ket, from a fund that has been do­ing well for years, does not war­rant any re­ac­tion. Sim­i­larly, even a poorly per­form­ing fund could give de­cent re­turns when the mar­kets are do­ing well. Also, the im­pres­sive re­turns may be due to the ag­gres­sive in­vest­ment strat­egy of the fund man­ager that may ex­pose you to higher risk than your ac­cepted level.

Sim­i­larly, it is quite com­mon to see in­vestors get­ting tempted to make changes in their debt funds de­pend­ing on in­ter­est rate move­ment. While there is noth­ing wrong in re­align­ing the port­fo­lio, hap­haz­ard changes can be counter-pro­duc­tive. It also helps if you se­lect funds well at the start of your in­vest­ment process.

As is ev­i­dent, re­bal­anc­ing the port­fo­lio can be a great tool to keep your in­vest­ment process on track. No doubt, it can be tough at times to re­deem in a ris­ing mar­ket or to in­vest in a fall­ing mar­ket. How­ever, re­bal­anc­ing im­poses dis­ci­pline and en­sures that your port­fo­lio mix does not take you beyond your de­fined risk pro­file.

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