It is commonly believed that having lump sums to invest in Mutual Funds will also lead to creation of lump sum amounts. To put it simply, money makes more money. While this is true to a large degree, how do you explain the phenomenon when small amounts have accumulated to become vast sums? Or an asset allocated portfolio with small sums in every class has generated stellar returns? If you examine the other side of the coin, you will find yourself remembering those times when people invested a lot and lost a lot. This is not a very uncommon phenomenon. Then why do some portfolios work better than the other? There is a common saying which goes as, a person who has
र 5,000 and knows how to save or invest is a better planner than a person who has र 50,000 and does not know how to save or invest.
There is one aspect that underlies every kind of investments, which makes it work and the absence of which brings everything down. The aspect is strategy. I am aware that the word strategy is a loaded with connotations of complex theories and ideas that layman investors would not associate themselves with. It sounds like war planning or game theory. However, let me assure you the strategy simply means different ways of managing your portfolio to have maximum impact by giving in minimum labour. Here are some Mutual Fund strategies that you can employ to build and watch your portfolio. Every strategy has its pros and cons and as an investor you have to choose the one most suitable for you.
A lot of investors have tried to time the market and failed miserably. A lot of experts have also concluded that one cannot time the market. Investors, who are invested in Equity Mutual Funds or Mutual Funds with Equity components, have a tendency to react emotionally rather than logically. They start redeeming and make losses when the markets are not doing well. Investors also invest when the markets are rising. It works on the flawed logic that redeem in falling markets to save your investments from making losses and invest at a high point by assuming that the markets will keep rising.
It should be the opposite. When the markets are going down you should make more fresh investments. When the markets are rising you should redeem, if you so require. This way it ensures a continuity of profits and minimizes loss. While trying to time the market is painstaking and hard, if not impossible. Following the market and making investments according to that helps to generate better returns than following the herd mentality and reacting emotionally to market changes.
This is the easiest strategy to follow and also the hardest. It is simple what the name suggests. You invest in a mutual fund either through lump sum or Systematic Investment Planning and you hold it for a long investment period. Sounds easy enough, right? This strategy also implies that you have shield yourself from the temptation of reacting to market changes and short term fluctuations. This works for investors who have understood that short term fluctuations are created due to noise and do not have any substantial impact in long term.
This strategy is known to work because of the statistical probabilities. Market is up 75% of the times and 25% of the times it is at a low. Market works in a cycle and the lows always lead to a high. This does not make any situation worse for the investors as you simply have to invest and hold on to the investments to watch the corpus grow.
This strategy is a middle ground between the market timing and buy and hold. It aims at engagement of investors with their portfolios after fixed intervals. You review your portfolio to keep making adjustments to the ongoing investments. For example - you have a lump sum of
र 100,000 and you invested र 25,000 each in four funds. After a year you analyse your portfolio and find that two of the funds have performed exceptionally well and two have been average performers. Your first instinct would be to redeem the average performers and boost the good performers.
This strategy suggests otherwise. You may redeem the funds that have performed exceptionally well and earn yourself good returns. You may reinvest that in the average performers. This strategy works on the principle that the markets are a cycle and the average performers could possibly be the star performers of tomorrow and the stellar performers could reach a low point. Even if you do not completely redeem the good performers, you may make fresh investments in the average performing funds. This way you may redeem part of the good performing funds while holding on to the rest for future returns and invest additional in the ones that may be performing averagely now but may perform well in future. This way you will be constantly rearranging your portfolio. Hence, using this strategy will enhance your returns much more than just staying invested or trying to time the markets.
This strategy is a not widely recommend or used one. It depends more on luck than on logic. As the term ‘wing it’ suggests, it depends on certain snap decisions that investors often take. The snap decisions could be taken by investors who are driven by an intuitive sense of investing or by investors who get excited by certain changes and make impulsive decisions. The question is, how effective the ‘wing it’ strategy is? It is hardly a consistent way to invest. The investors do not have a plan or structure in place. It is often said that this is the least effective way to invest.
To look at the other side of the coin, in a book called “Blink” by Malcolm Gladwell, he talks about the phenomenon of blink where humans know certain things intuitively even before the rational mind can process it and reason it out. In a lot of cases these judgements made in a snap have also been correct. Does this work in the case of amateur investors, who may not be able to distinguish impulse from an informed snap judgement? The answer is no. Investors should indulge in the slippery ‘wing it’ strategy only if they are seasoned investors. Seasoned investors have years of knowledge and experience with them who can make certain choices much faster and better than a person who has just started out. They have trained their gut over the years to think and react in a certain manner. Amateur investors are devoid of such experience and should steer away from such a strategy which sounds too good to be true.
This may not sound like a strategy but this should form an integral part of all your investments. A lot of times we get carried away by our investments and best way to make them work. We seldom stop to check the extent or authenticity of our knowledge. As an investor do you read enough about finances to be sure about the route to chart? Do you listen to your friends, neighbours and relatives and is that the key source of your knowledge about investments? These are questions we need to ask ourselves once in a while. Once you invest in knowledge, taking financial decisions will be much easier.
A strategy provides a certain comfort and power to the investor who knows that they will be able to write themselves a financial future regardless of their personal wealth. At the same time it must be hard to do all hard work yourself. Would it not be great if you could consult someone while you invested and discuss your strategies and ideas? If you think it is a good idea, then try looking for a financial advisor near you. It always helps to take a second opinion from someone who is experienced in this field. As far as the investment goes, they remain to work hard for you.
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