Investors avoid risk
Coming to our country, many investors saw for the first time since childhood how to invest in a certain way. It makes them think about investing in the same way. Traditional investments or traditional fixed rate investments mean that the returns here are very predictable from year to year and as a result, the risk associated with this type of investment product is negligible. Many investors traditionally don’t think about inflation-adjusted returns or actual returns. Because of this, despite the low rate of return, the perception of risk in these options is also very low. For this reason, many novice investors view investments in market options as fixed income investments and may not fully understand the relationship between projected returns and the risk associated with any investment.
Set a goal, then invest, but also look at the return
For example, suppose a father wants to save up for his daughter’s college education and needs a corps in 15 years. The estimated cost of higher education in 15 years will be Rs 2 crore. This means that the depositor can open a term deposit in any bank where the interest rate is 7 percent per annum. He will have to contribute Rs 7,43,825 at the beginning of each year for the next 15 years to complete the corps, thus achieving the goal. This is a really intuitive and predictable solution. But what if the interest rate in the economy goes down and as a result banks don’t offer 7 percent interest for 15 years, or if you can’t save that much every year, then what. If there is a need to save a huge amount, such as 7.4 million rupees every year, in order to achieve the goal, then some other options need to be considered. In such a situation, one should consider those options where the yield is high, i.e. profitability becomes high. By paying less than this annual fee, you can fulfill your purpose well.
Understanding the Importance of Compounding
In general, there are many traditional investors who are still not accustomed to investing money other than fixed income options. As a result, they do not fully understand the benefits of long-term interest accrual. They stay away from market investment options after learning about negative returns and increased market volatility. This is a practical issue. Incidentally, there are two better options for such investors in the Indian mutual fund sector. The first category is the Balanced Advantage Fund, which, by virtue of its product design, aims to eliminate the volatility of this market. It also gives investors the opportunity to feel comfortable in terms of risk reward. Another option is to focus on targeted investment and asset allocation.
Wrong strategy of frequent change of investments
Let’s take an example again to better understand it. Suppose that investor Mr. A started investing in 2010 and, based on the performance of various indices over the past year, decided to invest in a small cap index. Because it was the most productive index. He continues to invest in it for the next 3 years and at the end of the third year in early 2013 he calculates the return on his portfolio. He finds that the small cap index underperforms the market and the financial services industry index outperforms it. He decides to switch to financial services instead of Small Cap and continue to invest in them for the next 3 years. 3 years later, when it was time to reevaluate his investments in early 2016, A believes that the small cap index has once again outperformed all other categories. mr. A realizes his mistake and returns from the financial services index to the small cap index.
Don’t be fooled by the market, don’t be greedy
This cycle appears again, and in his next review in early 2019, he sees the same picture again. The Small Cap Index performed the worst in this cycle, and this time another FMCG industry index performed better. He gets embarrassed and decides to switch back to the FMCG index in his greed for earnings. However, by the beginning of 2022, the FMCG index turns out to be unsatisfactory. What is your forecast for the next 3 years until 2025 and will you become a master? If you were in place A, what would you do now?
The best buy and hold strategy
On the other hand, let me give you the last 12 years of data for the Nifty 500 Index (the benchmark for most flexible-cap funds) and the CRISIL Hybrid 50:50 Moderate Index (the benchmark for the most balanced leveraged funds). Based on the CAGR over the past 12 years, these 2 indices would have outperformed fair margins. The Nifty 500 TRI yielded a CAGR of 12.2% and the CRISIL Hybrid 50:50 Moderate Index yielded a CAGR of 10.7%. While d. Strategy A gave a yield of 7.4%. (Source: ICRA MFIE. The above is for understanding the concept of investment, not return scheme). Obviously, a simple buy and hold strategy might work better.