Are returns the only thing one should look at?

For most of us every rupee earned is important. Therefore getting a good return on the amount invested is also important.

If you are young your risk taking capacity is good, but at that point of time we are not sure how to go about investing. So most of the investing happens with the advice of friends and family.

But the ones who are giving advice base it on their experience and age and not as per your age and risk taking capacity. So typically happens is either the investment is in very safe investments like bank fixed deposits or into shares without understanding the risks.

So the important thing is understanding what you are saving for and how much time you have for achieving it. This will give you a head start instead of just focusing on returns.

How will higher returns help you if you do not know what to do with the money? This obsession of returns will just take your focus away from life. Stay away from anyone who just talks about returns instead of your needs and wants. You would notice many advertisements as well as bank relation managers of wealth managers just talking to you about returns without understanding your requirements.

Your focus should be to invest in such a way that there is capital protection as well as returns, but they never go hand in hand. Hence some amount of risk is always necessary and the amount of risk depends on your current status of life and where you want to be. So the focus should be on optimizing returns with the right level of risk, taxation, liquidity and income needs. Please note I have said optimizing and maximizing.

Also ensure that the portfolio is easy to understand and manage.

Most young people I meet, mostly the successful ones assume that they know everything about investing, they feel that because they have been successful in one area, they can be successful in all areas, especially investing. The reason is there is so much matter available on the subject of investing in newspapers, TV channels and over the web, that it looks very simple. This leads them to invest based only on returns without understanding the risks.

So if you really want to achieve your goals, contact a financial advisor who will first understand your requirement, suggest a strategy and then and only then suggest the product.

What to do in a Volatile market

In the first week of March a retired gentleman called me asked what should I do with my investments in mutual funds as the market has crashed? I just asked one question, do you need the money? He said no. My advice was then just hold on. A few days later he again called, saying my debt funds have also fallen and again I asked him the same question and our replies were the same. This gentleman now was very frustrated as he was losing money and did not know what to do. The thing is, was he really losing money or that losing money was just in his mind. More often than not, it is usually in our mind. The market is an unknown beast and we are trying to tame unknown and milk it. This is our problem.

Why do we want to go into unchartered waters without even learning the basics? My advice to such persons is, just do regular asset allocation. If we have decided to keep 50% of our financial assets in equity and the balance in debt, then on a regular basis just ensure that you are maintaining that balance. This will help in lowering the risk of your portfolio. Asset Allocation is the most boring job. We want excitement, but this most boring job helps keep our portfolio safe. This is what most of us want. We are ready to keep our money in fixed deposits in the name of safety, which is also boring, then why not asset allocation with higher returns and a little higher risk compared to Fixed Deposits.

Over a log period studies have shown that regular rebalancing even once a year has given better returns than doing nothing. Rebalancing is necessary because different asset classes give varying returns over different periods of time. Because of these varying returns, the asset allocation changes over a period of time. Regular rebalancing helps in restoring the asset allocation and also reducing the risk. In the bargain, you tend to book profits from the asset class which has grown and purchase at a lower price the asset which has not grown to the same extend. Mind you, we are not timing the market, but we are still booking profits on a regular basis.

So do not let your emotions drive your decisions, just do regular rebalancing. If you find it difficult, just go for professional advice.