An important point retail investors forget and don’t feel the need to realise is: clarity on financial goals. The biggest problem that most investors face is that they do not really spend enough time on writing down what their financial goals are and at what point of time in their life cycle they need money for what kind of purposes. Said Amitabh Chaudhry, Managing Director and CEO at HDFC Standard Life Insurance, “Take for instance insurance, you know, there is a research on the fact that your insurance amount should be to the extent of ten to twelve times your annual income, and that is you know a kind of yardstick a lot of people use and I am sure if we ask ourselves that question, you will realise that maybe we are at best, three to four times on our annual income. Hence, we need to realise why, what and when of the invested money.”
Another point investors need to bear in mind while investing is clarity on returns on investment and its horizon. There are many investors who hardly know or begin with the right notion of achieving returns. Just as greed knows no limits, investors when market go up, need to keep this in mind and keep a sort of range beyond which they would exit even when market would be moving up. If the investor pursues this strategy in the long-term he would be better-off than a trader or a shortterm gainer. Advises Sudhir Kapadia, Tax Markets Leader at Ernst & Young, India “I think if an investor has targeted returns in mind, then the problem is solved. And in this it is important that retail investors should invest for longterm period in order to reap handsome returns on their investment. The reason being this our tax policy which favours long-term investment. Hence investors should prefer equities and mutual funds, which give handsome returns over a longer-term and also because investing in traditional investment avenues like fixed deposits offer negligible post-tax returns.”
Much of the slim participation of retail investors can be attributed to the traditional mindset of investors where one would take minimum risks and secure guaranteed decent returns. Hence, fixed deposits have attracted a huge amount of investment. It is however seen that equity, mutual funds have provided investors far better returns than this traditional investment avenue. The only impending block retail investor faces is willingness to make time to check their investment status and growth. Stressed Manasije Mishra, Managing Director and CEO at HSBC InvestDirect, “Those investors who invest in far better lucrative investments such as equities and mutual funds need to keep a tab on their portfolio. At least 15 to 20 minutes must be dedicated to do a check whether the money invested is generating commensurate returns or not.” He added that for those who cannot do this on a frequent basis should invest in mutual funds where fund manager’s investment acumen would help them get rid of hassle of constantly checking their investment progress.
Mutual funds offer diverse options to retail investors to reduce the risk of losing on the principal capital. Options such as balanced (a combination of debt and equity), pure equity and pure debt funds. Balanced funds suit those investors who intend to diversify well and don’t want to lose their hard earned money. Dhirendra Kumar, CEO, Value Research said, “I think broad diversification can be achieved with one single investment which is a nice balance fund. You get diversification at different levels. With one single balance fund, I can tell you that you get asset allocation in equity and debt. You get a diversified equity portfolio, you get a diversified bond portfolio and you get automatic re-balancing, you get full tax efficiencies, being over 65% invested in.” Besides balanced funds, there are exchange-traded funds, which mirror the benchmark index. Investors who intend to play on pure market movement must invest in these funds. Not always when the index moves, stocks of companies you have invested move and hence investing exchange traded would help to gain from exchange-traded funds. In fact, a combination of a balanced mutual fund and exchange-traded funds must play a crucial role in asset allocation strategy.
With such wide array of investment options it is observed that investors despite following targeted returns still remain discontented. This is because many investors forget the rule of the thumb: are you playing the role of an investor or a trader. It is observed that it is the investor who benefits in the long-term not the trader. A supreme example of this is celebrated investor Warren Buffet, who has advocated investor’s approach to markets. Hence, you would be better-off in the long-term if you play the role of an investor.