Over the past few months, Indian stock markets have hit new highs and we hear about the impressive returns several stocks have given them in the past eight months after the government’s monetary action in November of last year (” demonetization ”). We have all, at different times, been tempted to join in the fun, and in several cases, we have put our capital in the ring, either by starting a SIP in an all-star mutual fund or by buying quite simply the actions that are doing well. But have you ever wondered if investing makes sense for you personally? Will this be a good addition to our current investment portfolio, or have we just joined in because everyone seems to be doing it?
For many of us, this may also be our first time investing in mutual funds or stocks, in which case it is even more essential to understand what we are getting into.
There is still a lot of writing about the risks of investing and there is the standard disclaimer that warns us that past performance is no guarantee of future returns. Yet most of our decisions are based on the simple rationale that this particular fund has done well, or that this stock is a definite “say my friend” winner, so let’s put the money.
Investments are always risky, but it’s all about how they adapt to your future needs, and your risk appetite is what matters. Therefore, not everything is good for everyone. Doing a SIP in a five-star large-cap fund or investing in the fastest growing mid-cap bank stocks may not be the most optimal solution for you because it does not take into account the most important factor. more importantly – YOU!
So how do you think about something like this and see what works and what doesn’t?
Let’s try to build a simple framework around investing using a game we all love: cricket. We will borrow the names of two Indian cricket legends to clarify the idea.
To play well, you need a balanced team. Choosing the right team and having players of all skills is essential for giving yourself the chance to win. The same applies to your investment portfolio: you need a mix of Sehwag and Dravid. It cannot all be one-sided. You have to mix this with equity as well as debt in order to get a well balanced game.
When building YOUR portfolio, these three are the most important things to consider:
- Why are you playing, i.e. your investment goals: You must view each of your investments as a process to help you achieve one of your financial goals, whether it is general wealth building / pension fund or savings for the new car you are considering. to buy. Each objective requires a different team game, just as the team composition must be optimized for each tournament and game format.
- The time you need to give a player to prove their worth, i.e. your investment horizon: Generating returns on investments takes time. Your wealth increases over time, depending on the type of investment you have made. Loan funds, for example, grow steadily, while stocks can give large returns over a short period of time, but can also lose value in the same amount of time. Over the longer term, however, stocks have generally delivered strong returns.
It’s kind of like when you have a Dravid on your team, you almost know the races will be done at one end every time. But with a Sehwag, you might have to wait a few matches to see the swashbuckling match win the rounds. You can see a series of low scoring rounds, but given the time, you will get the outperformance. The same goes for investing: debt funds will grow slowly but steadily; Short-term stocks can have their ups and downs, but a good portfolio of stocks will outperform in the long term.
- When you strike, know where your stump is – your risk appetite: Some players are very comfortable chasing balls thrown outside the stump. They hit and miss, but that’s how they play. Sehwag is one of the best ‘see-ball-hit-ball’ drummers the world has seen. It involves highs and lows of scores, but we all know the brilliant career he has had. Unlike a Dravid, which has given many master classes leaving the balls outside the stump. Both knew where their stump was and harnessed their strengths. Likewise, as you invest, stocks keep going up and down in value. Unless you’re comfortable with the idea, it might not be the best investment, even if it’s in a five-star equity mutual fund. Debt investments, on the other hand, are more secure in comparison, but the “rating rate” is certainly slower. You have to mix and match and achieve a portfolio that you are comfortable with and not just invest with the tide.
These are the three simple and basic ideas for building your investment portfolio. These are helpful tips to keep in mind whenever you invest. Investing to build wealth is like playing a game of cricket. You need the right team for the right timeline and the right understanding of your own risk appetite to be successful.
All investment products offer a risk / return tradeoff. High-growth, volatile (upward and downward) small-cap equity funds are available, as are short-term debt funds that offer stable returns that are slightly higher than bank term deposits. .
They’re all there, the only thing to see is if they fit your team. Do you have the time to let them perform and the conviction to remain calm in the face of market movements? If you’ve fixed this problem, you can easily navigate the meanders of the market and grow your wealth without breaking a sweat.
The most difficult step, of course, is knowing who to choose from your team. For this you need to understand the strengths and weaknesses of the players available. In the investing analogy, this can be done by doing some research on your own, or you can hire a registered investment advisor. Once you know the choices available, it comes down to thinking about your financial goals, tucking them into time horizons, and then, based on your own risk appetite, choosing the best team. This is how the pros play the game!
Investing is like cricket; not every ball needs to be hit, just like every market rally doesn’t need to be engaged. Well left is well played too, if you understand what you are aiming for. Good investment!
Please note:The illustration above with the cricket analogy is an attempt to make the subject simpler and easier to understand. The authors are big fans of the mentioned cricket legends and use their names with the utmost respect to explain the investment case. We apologize in advance if any of their fans’ feelings are hurt in any way. The players mentioned do not endorse any part of this writing or Upraise.in in any way.