Should we invest now? Or should we wait for the market correction? Can we make target returns in such a high market? Should we buy more to lower the average price? Can we invest in such a volatile market and earn reasonable returns? These, and other related questions, often delay the investment decisions of people. Investors tend to lose money in both scenarios a) if they don’t invest, they miss the market beta and inflation impact b) if they invest in a wrong product, they might earn less income or suffer income and capital loss or both (in some cases).
No matter how much experience you have in managing money, you can still go wrong in multiple ways. Sticking to one style of investing or having a biased view on a particular sector/stock or not reviewing and rebalancing the portfolio at regular intervals can lead to serious underperformance of the portfolio. So, what are the key factors that one should look at while investing? Investing money is a crucial financial decision that can greatly impact one’s financial health and future. Ideally, investors should focus on three key factors of investing – Risk, Liquidity and Return.
The first factor is risk. How likely you are going to get the returns that you expect over the investment tenure. Different types of investments carry different levels of risk, with higher risk investments typically offering the potential for higher returns. It is important to assess your risk tolerance and choose investments that align with your financial goals and comfort level. Diversifying your portfolio can help largely mitigate risk.
The second factor is liquidity, which refers to how easily and quickly you can convert your investment into cash without impacting its value. Investments like stocks and bonds are usually considered liquid because they can be easily bought or sold on the market. However, some investments, such as real estate or certain types of securities, may have lower liquidity and may take longer to convert into cash. It is important to consider your liquidity needs and ensure that you have access to cash to meet emergencies or other expenses.
The third is return, which refers to the profit or gain you can make from your investment. Higher risk investments typically offer the potential for higher returns, while lower risk investments generally offer lower returns. It is important to strike a balance between risk and return that aligns with your financial goals and investment timeline. Consider factors such as the historical performance of the investment, fund track record, full cycle demonstrated capabilities, the current market conditions, and any potential outlook before making investment decisions.
In an ideal scenario, investors will aim for low risk, high return, and high liquidity products. However, getting all three together is difficult. It takes research and time to plan your investments correctly. A small mistake can cause you to have your money locked up tight when you need it or face a severe loss when you least expect it or be facing very small growth over a long period.
Investors now have a choice to invest (directly or through an investment professional) in multiple products through a fund house (in MFs, PMS, AIFs products) that can optimize on all three factors of risk, liquidity and returns. Fund managers will rebalance portfolios in accordance with the overall objective of the MF, PMS and AIF schemes that they manage and based on the risk (low to high) and returns parameters (target benchmark index) on the background of high liquidity. Investors can choose the required option that suits their risk profile.
Once these key factors are addressed, investors can further look at other parameters like pedigree and age of fund house, strong leadership team, performance-based fees, or fixed fee structure, exit load, tax implications, economic cycles, and so on. Ignoring these factors could lead investors to make suboptimal decisions.
Deepak Sood is senior partner, and head -fixed income, at asset management firm Alpha Alternatives.
