Time plays the biggest role in successful investing

Posted by Mehul Kothari | Published on 14 Feb 2019
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Time plays the biggest role in successful investing

Time is a key factor in your success as an investor. With endless choices of investment options available, it’s quite complex to make the right choices that can contribute to successful investing. So, to make it work for you, one of the most important question to be considered is, ‘’what is your time horizon to achieve your end goal?’’. The answer can help you to major extent to decide on best suitable investment vehicle.

Time can affect your investment in multiple ways. Let’s take a look at the investing guides.

✓ Risk and time

The risk tolerance level is affected by element of time. Let us understand this with an example. Let’s say you are planning for retirement which is several years away, then you can afford to invest in relatively risky and high-return potential assets like equity . That’s because you will have enough time to overcome market volatility. In case you have a shorter time span, say about two to five years, then you may want to go with investments that are stable and less risky, even if the returns are lower.

 

✓ Growth potential

The power of compounding takes time to work. So, the longer one remains invested, the better it is. Let’s illustrate this point with an example: A monthly investment of Rs 10,000 at 12% rate of return amounts to:

 

So, it can be easily seen with systematic investment of Rs 10,000 per month over the years, the amount compounds very fast when the number of years invested are high.

✓ Targeted objective

Goals keep changing with age, change in lifestyle, etc. So, it’s important to start investing early to build successful portfolio. Goals can be both short term and long term. The timeline of your goal helps you choose the right investment option. For instance, if you have a short-term goal like buying a car, it is best to invest in debt. On the other hand, a long-term goal can be achieved by investing in stocks. You may say that stocks are risky but time generally has a calming effect on them. Give your stock investment some time to breathe and you’d see the famed volatility subside. The up-and-down nature of stocks usually tend to flatten in the long run.

To surmise, time is one of the most important factors that affect investment decisions. It is also the catalyst to see your money multiply.

What’s Next?

Returns are a very important factor in investments but it is not the be all and end all. It needs to be weighed with risk and then chosen. However, return is the one factor that can be explicitly measured and thus plays an important role in our investment decisions.



Disclaimer:  Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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What is a ‘good’ return on your investment?

Posted by Mehul Kothari | Published on 14 Feb 2019

‘Return’ is the first word that comes to mind whenever you hear about an investment option. Return is the measure of performance and efficiency of an investment option. Everyone wants an investment with a better return potential but with underlying risk associated with the same. Every investment gives return in different ways. Savings and bonds give return in the way of interest. Stocks and mutual funds pay out dividends. Instruments like stocks, bonds, mutual funds and ETFs also appreciate in value and provide capital gains when sold.What is a ‘good’ return on your investment?Everyone wants to get good returns. What is good to one may not be good enough for another. Categorization of good and not-so-good returns are derived from comparative analysis. Returns of various products are compared in consideration with features, time horizon and investor portfolio.- Benchmark performance:For example, mutual funds are compared based on their previous performances and their benchmarks. If a mutual fund is able to derive a sustainable and good alpha, i.e. performance over its benchmark, while keeping the beta (risk) low, then it is a “good” return. A benchmark is a standard set against a mutual fund so that it can be measured. Since 2012, SEBI has mandated mutual fund houses to have a benchmark to measure its relative performance. For example, if the Sensex has given a return of 12.65% in the last three months and a particular mutual fund has given 14.75% annualised return, then the relative performance is 2.1% more than its benchmark.- Past performance:Previous performance is often considered while making future investment decisions. It may not be the all-important feature, but you should give it a look before opting for a specific fund.- Consistent Returns:Some say that penny stocks can provide “good” return. But so is gambling -- if you get lucky. But what if you don’t? That’s where “good” investments come into play. “Good” return is consistent returns over a longer tenure. Not just returns!Returns are surely important but it is not the only factor that needs to be considered. Higher the return expectation, higher the risk. So, if you are not too keen on taking too much risk in your investment portfolio, then you would have to settle for lower returns and vice versa. If you need high returns, you must accept the volatility of your investment portfolio.However, if you have time on your side, you can opt for high returns without risking your portfolio since the time horizon eases out market fluctuations. So, to generate a good return, it makes most sense to consider all the following points of investing fundamentals mentioned below.✓ Selection of right investments based on one’s risk appetite, investment goals and asset allocation✓ Understanding before investing ✓ Having a long-term perspective for investment goals fulfilment✓ Diversification of investment portfolio ConclusionReturns are important but it is not the be all and end all of investments. It is more important to stay disciplined because it can help you to achieve your financial goals Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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Risk and time: All you need to know

Posted by Mehul Kothari | Published on 14 Feb 2019

Risk and time are two important considerations in any investment decision. They are the ingredients that help you reach your financial goals. Therefore, it is important to know how they play off each other. Understanding their relationship can help you achieve financial goals over time. So, let’s get down to understanding the jugalbandi between risk and time in the investment world.✓ Short-term goals Every investment carries different types and degree of risk. Investments like short-term bonds carry minimal risk for an investor with a short-term goal. With a shorter span of time available to achieve goal, you would prefer an investment with less risk and more stability. Capital protection would be more important than a high return expectation here. On the other hand, investing in less riskier investments like short-term bonds or cash would be a riskier option for someone who is saving for retirement, a goal that has a longer time horizon. Such investments may not deliver inflation adjusted return. ✓ Long term goals Goals with a longer time horizon need you to take considerable amount of risk to get the potential return expected. Aggressive investment vehicles like stocks, equity mutual funds and real estate are some of the investment vehicles that can help you in the long run. Yes, aggressive investments are more volatile and risky. But historical data suggest that the risk element usually wears off over longer term. Basically, a longer time horizon can help your investments ride through many market cycles. The reasons for this are manifold. Some of them are:1. Rupee Cost Averaging: High the volatility, higher the advantage. Higher the time, higher the chances of averaging the cost. It works in both rising as well as falling markets.2. Higher risk can be taken with longer tenure so that there is time to make up in case of loss of wealth in the interim.3. Risk can also increase with time for debt funds:    a. Interest rate risk- Duration funds have higher risk than accrual ones    b. Credit risk    c. Reinvestment risk-     d. Liquidity riskThis simply means that each investment has some inherent risk attached to it which gets affected with time.
 Bank fixed deposits (FDs) have reinvestment risk that comes at the time of maturity of the FD and not before that. So, in a falling interest rate situation like now, FDs need to be booked for a longer tenure to gain in the long run. Similarly, even interest rate risk and liquidity risk need to be evaluated over time. For properties, there is an element of liquidity risk in an emergency situation when money is needed immediately and there is little time. That’s when you may face problems of finding the right buyer. Investment and risk are two sides of the same coin and accepting one means accepting the other. However, most people think risk is only market risk but actually each and every investment has some risk associated with it. For instance, bank FDs carry reinvestment risk and interest rate risk, equity has a market risk, while Public Provident Funds (PPF) can have interest rate risk and liquidity risk To sum up, the investment’s timeframe and risk management need to be calibrated deftly to achieve long-term financial goals.   Disclaimer: "Investment in securities market are subject to market risks, read all the related documents carefully before investing."

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