Investors need to know about risk appetite, diversification
Updated: August 6, 2019 3:22:23 AM The Financial Express
Most of the times it has been observed that to chase higher returns and without knowing their risk appetite or time horizon, investors land upon a product which is not suitable for them.
By Gautam Kumar
A friend of mine has been investing for a long time in bank fixed deposits and recurring deposits.
About two years ago he started investing in mutual funds through systematic investment plans (SIP) on the advice of a robo-advisory firm. In one meeting with him, I understood the importance of financial literacy from investors’ perspective. Though his investments did not perform well, I realised that he had understood the importance of diversification, goal setting, risk appetite, time horizon and other factors.
He also realised how important it is for an investor to interact with his advisor who can then understand the investor’s emotions and sentiments and advise him accordingly. Advisors also make investors aware of the risk associated with each asset class and products within each class. My friend also realised that only after understanding their own risk appetite, time horizon and specification of goals in consultation with the advisor, investors should proceed with their investments.
Don’t simply chase returns
Most of the times it has been observed that to chase higher returns and without knowing their risk appetite or time horizon, investors land upon a product which is not suitable for them. For instance, my friend was suggested an ultra-short term fund which was generating alpha by taking very high credit risk on his money which he needed after two years. But he did not want to take that much risk on his capital. He moved his money from ultra-short term fund to a corporate bond fund which had almost 80% of its portfolio in the safest (G-Secs) and highest rated papers (AAA) and its average maturity matched with his time horizon.
Know the product before investing
It has also been observed that at times investors blame the fund/ scheme or asset class or market as a whole and also advisors for mistakes of their own. My friend made one of the mistakes discussed above. He went for robo-advisory services which suggested him some funds which were neither suitable for his time horizon nor for his risk appetite. Thankfully, he was made aware about each product he wanted to know and his investment portfolio was reshuffled in tandem with his requirements .
Investors get lured by high returns and enter the market when it is performing at its best and end up buying expensive. Then when the market starts falling, they exit. Jumping out of the boat will surely see you drown while staying put and fighting against the high tides will take you to the shores.
Similarly, getting out of the market is not a solution because you are selling cheap what you bought expensive and are therefore, losing money. Rather, investors should stay invested and sometimes incrementally increase exposure (obviously after proper advice) to funds which are of good quality but are available cheap and reap the benefits in the longer term.
Therefore, investors should not lose hope during tough times but have faith in their advisor, voice their concerns and ask for review of their portfolio periodically. Last but not the least, though no one till date has been able to tame the wild beast known as the “market”, the more time you spend here, the more you learn and earn. Patience is the key.
(The writer is a certified financial planner)