As an investor, you must have faced the dilemma of how to invest effectively. Adding to this, the anxieties arising out of uncertainties surrounding the financial markets might have affected your decision making process.
The fact, however, is that investing is a simple process that requires planning, perseverance and time. By following a disciplined approach to investing, you can not only achieve your investment goals but also keep emotions out of the process. Here's what you need to do to ensure your investments remain on track:
Have an investment plan
Many of us delay investing, either for the fear of choosing a wrong investment option or thinking we do not have enough money. Since investing is a continuous process, you can begin even if you don't have a lump sum amount to start with. However, you must have an investment plan in place. It would help keep you on track, disciplined and focused on your investment goals. A carefully designed asset allocation strategy, and the process of rebalancing it, from to time, will ensure you remain invested in originally selected asset classes at all times. It will also help you in tackling bull and bear markets without letting the “greed and fear” factors affect your mindset.
Don't underestimate risk and/or overestimate returns
While making investment decisions, a balance must be maintained between risk and reward. To ensure this, the key is not to underestimate risk and/or overestimate returns. Therefore, you must understand the potential and the risks associated with different asset classes in your portfolio. This helps in avoiding disappointments, and the consequent panic reactions that may derail your investment process.
Don't compromise your long-term goals
Many of us often lose sight of our long-term goals when we spot an opportunity to earn some short term gains. For example, in a current market-like situation, it can be tempting to pull the money out of equity markets and invest it in debt instruments. However, if you do so, you would be compromising the long-term prospects of your portfolio. Similarly, a depressed stock market may tempt you to invest even short-term money in it to make a quick buck. This could result in you either losing a part of your investments or earning low returns. Remember that timing the market is a strategy that even experts find difficult to implement successfully.
Have a tax-efficient portfolio
While paying taxes when necessary is understandable, paying more taxes than necessary is not! Therefore, ensuring your portfolio has the utmost tax efficiency is one key factor that can help improve your portfolio returns. While it is true that tax efficiency of the instruments alone cannot guarantee success, a tax-aware investment strategy can make a substantial difference to your portfolio's ultimate size.
Tax efficiency is important for both short-term as well as long-term investing. While we primarily focus on debt instruments, while investing for the short term, tax-efficient options such as a debt mutual fund can help you in earning higher post-tax returns. It becomes even more important when you plan for your medium and/or long-term investment goals such as children's education, buying a house and retirement planning. To achieve these very important goals of your lives, it is essential to invest in options that have the potential to provide higher as well as tax-efficient returns. This factor is very important, especially considering the escalating costs. That's why equity has an important role to play while designing a portfolio for long-term goals. Remember, investing to beat inflation generally involves steering clear of tax-inefficient instruments.
The author is CEO, Wiseinvest Advisors.
