Identify which cyclical phase an asset class is going through before investing and avoid oversubscription
Increasing the wealth creation potential of your portfolio can be a tedious task at times. It requires decoding a lot of complex information to make the right decisions. Investment planning is an activity that is hence suggested, to be done with the help of an expert financial advisor. With so many options available to invest in, the right approach would be identifying an investment opportunity that matches your investment objective(s).
The pandemic-induced market situation has pushed many new retail investors towards making sound financial investment decisions. Hence, it wouldn’t be appropriate to label an asset class as an outright good or bad investment opportunity. This is mainly because each asset class goes through a cyclical phase. So, the trick here is identifying which cyclical phase an asset class is going through before investing.
For example, gold may be a good investment for someone planning to allocate 2-5 per cent of the overall portfolio. But the same instrument, when oversubscribed, may end up harming the overall performance of your portfolio.
How to approach unconventional investments?
Setting benchmarks: The most common mistake many retail investors tend to make is setting the wrong performance benchmark. Investors should not take into consideration the last two years' returns when setting benchmarks for their financial performance. Any return above 15 per cent is generally considered a good return.
Personalised approach: Investments are always best done with a personalised approach. There isn’t a ‘one size fits all’ concept applicable when making investment choices. Instead, personalised and customised solutions built considering the long-term goals often yield the best possible results.
Making the right choice: People often tend to ignore looking at passive investment fund options through ETFs. However, importance should be given to debt investments equally when compared to savings accounts and fixed deposits. In addition, there are other investment options also available that can give a CAGR of 10-12 per cent, about which very few retail investors are aware.
Understanding crypto: A wide range of financial investment products are now being made readily available in the market. Eventually, it all comes down to selecting the right ones for yourself. One such newly developed investment option is cryptocurrency. However, before investing in cryptocurrency, the most critical aspect to consider is that any financial instrument that the central government does not recognise can never become a legal tender. Hence, it is suggested that you gather a deep understanding of risks associated with the cryptocurrency spectrum that’s currently unregulated and unrecognised. However, the underlying technology of cryptocurrency, blockchain, is a distinctive and path-breaking architecture.
Risk appetite: Customers with a higher risk appetite and seasoned investors could seriously consider investing in global equities. One way of finding out if such unconventional investments suit your portfolio is by decoding the risk to reward ratio associated with it.
Get your basics right: There are three foundations of investing that everyone should stick to; allocation, selection, and rebalancing. One should never allocate entire funds available into a single asset class. Setting an allocation percentage for each asset class as per one’s risk appetite is the first step towards creating a good investment portfolio. Next comes selecting specific opportunities within each asset class that can provide growth opportunities. Lastly, it is highly recommended that the entire portfolio is rebalanced and optimised for improved performance once every quarter or at least once every six months.
Retail investors should recognise the power of financial planning and investments into different asset classes aided by the help of professionals in financial planning and services. A good financial advisor always advises appropriate diversification of portfolios based on individual risk appetite rather than simply suggesting investments into equities or any single asset class.
The author is Director at Marwadi Shares and Finance Limited
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.