Follow the basic Principles in Investment

The single party majority verdict in the recently held parliamentary election and forceful promises made by the Prime Minister to improve the economy has triggered bullish rally in the current share market. Once the economic policies of the new Government get implemented and investment cycles start kicking, the market may reach new heights.

Many retail investors have abandoned the equity market earlier. But it is right time to invest in equity now. The current situation provides an opportunity where the probability of market going up is high vis a vis the downside risk.

Goal based investing; The first question to be asked before investment is for what goal you should invest? The goals may be Children’s education/marriage, Retirement corpus, Buying a house etc. Investing for a goal provides answers on horizon of the goal. The longer the goal horizon, the lesser the volatility of the performance due to mean reversion. In case of Debt segment, higher duration instruments provide higher appreciation in case of a declining interest scenario.

Risk appetite; Risk tolerance varies across investors. The investors’ categories are aggressive, moderate or conservative. The aggressive investors believe in higher the risk, the higher the return”but at the same time they are ready for absorbing any loss. The conservative investor cannot tolerate loss and hence should be satisfied with risk free and average returns. Further the capacity of the investor to absorb loss also affects investment decision. Now days, online tools are available to determine risk appetite scores(We use Finametric tool). Before giving investment advice, the Financial Planners take a call on risk appetite depending on the situation of the investor.

Asset allocation; Warren Buffet’s saying goes “Do not put all your eggs in one basket”. Different asset classes’ i.e equity, real estate, debt, gold, commodities etc perform in varying degrees in different market periods. Equities underperformed after 2008, Debt underperformed during increasing interest scenario, Real estate is down with slow down in the economy etc. Remaining invested in different asset classes will ensure diversification of the risk and hence bring stability in returns. Asset allocation is determined having consideration to the age of the investor, goal horizon and risk appetite. A simple rule is; equity allocation is 100 minus age.

Rebalancing; Once asset allocation is arrived at, it is advisable to periodically review it and restore the balance. For example, if the original Equity:Debt allocation is 60:40 and rally  in the equity market makes it 65:35;it is advisable to book profit in equity(5%) and bring the allocation back to 60:40

Rupee cost averaging; Retail investors are influenced by greed & fear and they lose by trying to time the market. Market volatility is best addressed through Rupee cost averaging which is buying periodically in different market conditions/periods. Investment through SIPS in Mutual Funds is the best example on this.

 Who should be your Adviser? Investing in the current market requires time and energy. If you are starved of time, it is always better to seek advice from a Certified Financial Planner who is also a SEBI registered investment advisor who can provide unbiased and right advice.

Last modified on Saturday, 19 July 2014 07:41

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

3 comments

  • Sujata Aniruddha Sapkal

    posted by Sujata Aniruddha Sapkal

    Monday, 27 July 2015 07:52

    A common investor should try to analyse his or her financial goals and prioritize them,measure the risk appetite,and then decide on the ideal combination of investment instruments i.e.proper asset allocation,ratio of equity,debt,real estate and gold.This may be done with the help of expert SEBI registered financial Planner.

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  • Minecraft.Net

    posted by Minecraft.Net

    Friday, 22 May 2015 10:02

    Wonderful blog! I found it while searching on Yahoo News. Do you
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  • suresh

    posted by suresh

    Thursday, 05 June 2014 12:24

    Very good article with simple basic information.

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