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Rediff.com  » Business » 7 GREAT investment tips for BIG returns

7 GREAT investment tips for BIG returns

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July 26, 2006 13:46 IST

Equity funds, if selected in the right manner and in the right proportion, have the ability to play an important role in achieving most long-term objectives of investors in different segments. While the selection process becomes much easier if you get advice from professionals, it is equally important to know certain aspects of equity investing yourself to do justice to your hard earned money.

Knowing them and by using them in the selection process can make a big difference to the end result. Here are some important investment guidelines:

1. Know your risk profile

Before you take a decision to invest in equity funds, it is important to assess your risk tolerance. Risk tolerance depends on certain factors like emotional temperament, attitude and investment experience. Remember, while ascertaining the risk tolerance, it is crucial to consider one's desire to assume risk as the capacity to assume the risk.

It helps to understand different categories of overall risk tolerance, i.e. conservative, moderate or aggressive. While a conservative investor will accept lower returns to minimise price volatility, a moderate investor would be all right with greater price volatility than conservative risk tolerances to pursue higher returns.

An aggressive investor wouldn't mind large swings in the NAVs to seek the highest returns.

Though identifying the desire for risk is a tough job, it can be made easy by defining one's comfort zone.

2. Don't have too many schemes in your portfolio

While it is true that diversification helps in earning better returns with a lower level of fluctuations, it becomes counter productive when one has too many funds in the portfolio.

For example, if you have 15 funds in your portfolio, it does not necessarily mean that your portfolio is adequately diversified. To determine the right level of diversification, one has to consider factors like size of the portfolio, type of funds and allocation to different asset classes. Therefore, it is possible that a portfolio having 5 schemes may be adequately diversified whereas another one with 10 schemes may have very little diversification.

Remember, to have a well-balanced equity portfolio, it is important to have the right level of exposure to different segments of the equity market like large cap, mid-cap and small cap. In addition, for a decent portfolio size, it is all right to have some exposure in the sector and specialty funds.

3. Longer time horizon provides protection from volatility

As an equity fund investor, you need to understand that volatility is an integral part of the stock market. However, if you remain focused on the long-term objectives and follow a disciplined approach to investing, you can not only handle volatility properly but also turn it to your advantage.

4. Understand and analyse 'Good Performance'

'Good performance' is a subjective thing. Ideally, to analyse performance, one should consider returns as well as the risk taken to achieve those returns. Besides, consistency in terms of performance as well as portfolio selection is another factor that should play an important part while analysing the performance.

Therefore, if an investment in a mutual fund scheme takes you past your risk tolerance while providing you decent returns, it cannot always be termed as good performance. In fact, at times to ensure that your investment remains within the parameters defined in the investment plan, you may to be forced to exit from that scheme.

In other words, you need to assess as to how much risk did the fund manger subject you to, and did he give you an adequate reward for taking that risk. Besides, you also need to consider whether own risk profile allows you to accept the revised level of risk

5. Sell your fund, if you need to

There is no standard formula to determine the right time to sell an investment in mutual fund or for that matter any investment. However, you can definitely benefit by following certain guidelines while deciding to sell an investment in a mutual fund scheme. Here are some of them:

  • You may consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
  • You need to hold a fund long enough to evaluate its performance over a complete market cycle, i.e. around three years or so. Many of us make the mistake of either holding on to funds for too long or exit in a hurry. It is important to do a thorough analysis before taking a decision to sell. In other words, if you take a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.
  • You should consider coming out of a fund if its performance has consistently lagged its peers for a period of one year or so.
  • It doesn't make sense to hold a fund when it no longer meets your needs. If you have made a proper selection, you would generally be required to make changes only if the fund changes its objective or investment style, or if your needs change.

6. Diversified vs. Concentrated Portfolio

The choice between funds that have a diversified and a concentrated portfolio largely depends upon your risk profile. As discussed earlier, a well-diversified portfolio helps in spreading the investments across different sectors and segments of the market. The idea is that if one or more stocks do badly, the portfolio won't be affected as much.

At the same time, if one stock does very well, the portfolio won't reap all the benefits. A diversified fund, therefore, is an ideal choice for someone who is looking for steady returns over the longer term.

A concentrated portfolio works exactly in the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases your chances of under performing or losing a large portion of your portfolio in a market downturn. Thus, a concentrated portfolio is ideally suited for those investors who have the capacity to shoulder higher risk in order to improve the chances of getting better returns.

7. Review your portfolio periodically

It is always a good idea to review your portfolio periodically. For example, you may begin reviewing your portfolio on a half-yearly basis. Besides, you may be required to review your portfolio in greater detail when your investments goals or financial circumstances change.

While reviewing the portfolio, you must consider the following:

  • How is your portfolio performing from the viewpoint of your personal goals? Are you comfortable with the price fluctuations that may have occurred keeping in view your short term, medium term and long-term goals?
  • How are your investments performing compared with others in the same category? It is important as for example, a 15% growth in your fund may look great, but not if the average returns given by other funds in the same category is 25 per cent. However, too much emphasis shouldn't be put on the short-term performance.

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com

For more on mutual fund investments, log on to www.moneycontrol.com.

Hemant Rustagi, Moneycontrol.com
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