‘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
Returns 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.
Investor profile is all about knowing your preferences in investment decisions. Before you start investing, it’s important to know the type of investor you really are. More often than not, we assess our strengths and weaknesses differently. Going through a formal investment profiling would help in creating a portfolio for the long term without having to re-evaluate every now and then.So, making an investor profile depends on various factors like risk tolerance, investment goals, investment time horizon and changing financial circumstances and needs.To determine your investor profile, you could ask yourself a few questions that can help you self-evaluate.▪ Goal-based profiling This can be understood by taking your income and expenses into consideration and then evaluating your disposable income. Calculating your disposable income is important. It tells how much money you can invest every month. Once that is evaluated, there are a couple of funds that need to maintained. They are: o Contingency fund with at least 12 months’ expenseso Medical emergency fund for an illness which may or may not be immediately covered by health insuranceo Child’s education fund o Retirement fund Tip: There is not much you can do about your fixed expenditure like EMIs or other loan repayments. However, you can take stock of your discretionary expenditure and create a headroom for investment. ▪ Investment horizon This can be broadly classified as short-term, mid-term or long-term based on your tenure of investment. o Short-term investments are made for immediate goals in the next three years. These investments need to be kept handy and not be prone to volatility. Thus, it needs to be kept in a cash or liquid fund for easy access. Such investments are usually done to meet regular cash flow requirement and emergencies. o Mid-term investments can help you meet your financial goals in five to seven years. Since the tenure is not long enough, your investment can be parked in medium-term debt investments or bank fixed deposits or even balanced funds because market volatility does not affect its liquidity after three years. o Long term investments are for more than 10 years or indefinite timeline. Thus, equity exposure can be taken for long term investment needs.Tip: The earlier you plan for your investments, the better it is so that it can be planned well ahead and the power of compounding can really work and do wonders for your portfolio! ▪ Investment profile Once the disposable income and the investment horizon is known, the very objective of the investment needs to be ascertained. To determine an individual’s investment profile, his risk capacity, appetite and tolerance need to be known.✓ Risk tolerance is the amount of risk you can take in your investment portfolio without losing your sleep over the volatility of the portfolio✓ Risk capacity is the amount of risk you can afford to take so that your financial goals are not jeopardised. ✓ Risk appetite is the amount of risk you need to take in order to fulfill your financial goals. The combination of all three (as depicted in the picture) is the risk profile of the individual. Tip: You need to determine your risk-taking capacity and investment objective together so that you can maximize returns on your investment portfolio without taking too much risk exposure. ▪ Investment experience If one has a considerable experience in investing, his risk-taking capacity is more accurately determined than others since he knows what is expected from each investment. For new investors, it is inevitable that a new investment option needs to be explored bone-deep before taking the plunge.Tip: Age is often synonymous with lesser risk since time horizon is low. ▪ Asset allocation Asset allocation is all about choosing an investment strategy and products based on your risk appetite. Please note that it’s important to review your asset allocation once a year as it can change with time due to change in your investment goal and risk tolerance. Tip: Equity is healthy and good for your portfolio but so is debt. A mix of the two blended with your investment objective and horizon can be ideal. So, monitor your ideal asset allocation at all times, irrespective of the market situations and you will see a marked difference in your overall portfolio.ConclusionIn order to excel in your investments, you need to be completely honest in your evaluation of your investor profile. Self-evaluation can be quite tricky at times and thus professional help can help you define your financial goals. You need to assess your investment needs and then design an investment strategy more appropriately.Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before 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 potentialThe 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 objectiveGoals 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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