Stock markets or mutual funds test the patience of investors. Have the right approach.
Over the years, investors have had mixed experiences from their equity fund investments. Though every investor would like to derive the maximum benefit from the potential of the stock market, not many are fortunate enough.
Needless to say, a combination of factors such as wrong selection of funds, poor fund performance, mis-selling and the tendency to time the market, result in unpleasant experiences from time to time.
No wonder, only a small percentage of investors in our country are invested in equity and equity-related funds at any given point in time. The question, therefore, is whether the fault lies with equity funds as an investment option or with the approach followed by investors.
Though mutual funds provide a simple yet efficient method of investing in the stock market, investors still have to face the vagaries attached to them.
Therefore, it is vital not only to make the right choices in terms of fund selection but also have the right mindset. The key to success is to look beyond the short-term performance and invest in well-managed funds. It is also important to ensure the portfolio does not suffer from over-diversification.
Many investors make the mistake of having too many funds in their portfolio. A situation like this arises mainly because they chase short performance and end up investing in the very fund that gives good returns at some point or the other. Besides, there are investors who do not follow an asset allocation strategy, leading to a haphazard fund selection.
The stock market volatility challenges the patience and resolve of investors quite often. It is quite common to see them grappling with the implications of market volatility on their portfolio as well as with the resultant indecision with regard to existing investments as well as to invest fresh money into equity funds.
Another challenge for equity investors is to handle the company-specific as well as the market risk efficiently. Though, the company-specific risk is tackled by fund managers for mutual fund investors, market risk, that is, volatility risk has to be handled by investors themselves.
While fund managers follow a research driven investment management process as well as a quantitative risk management approach to tackle the company specific risk, a disciplined investment approach by investors can go a long way in allowing them to handle the market risk efficiently.
A disciplined and long-term approach takes away the speculative element from the investment process and ensures success over time. Though making regular investments does not guarantee profits at all times, a disciplined approach ensures that one continues to buy even in a falling market and benefit the most when the markets start moving upwards.
While it is true that even those who invest through SIP can suffer losses temporarily during the market downturn, the impact on their portfolio would generally be much less as they continue to invest at lower levels. Therefore, more money they invest at the lower levels, the lesser recovery they have to make to turnaround their portfolio performance.
On the other hand, investors who do not follow a disciplined approach often stay away from the markets during the turbulent times as they see a market downturn as a disaster rather than viewing it as an opportunity to invest at lower levels.
Another important aspect of equity investing is to determine the right level of risk tolerance as it can go a long way in designing an optimum investment strategy.
Remember, there is a thin line between investing and gambling. Make sure you do not cross that line. It’s time to also learn to say “no” to products you don’t really want or need.
The author is CEO, Wiseinvest Advisors