Inflation is a reality we have to accept. The cost of living is increasing every day. Every place has felt the heat of inflation, from big cities like Kolkata to tier-2 cities, small towns and villages. Hence, it has become imperative to properly invest your funds to beat inflation and achieve all your financial outcomes as planned.
Investment strategies are model plans crafted by experienced investors. They have stood the test of time and can help millennials and Gen Z with their financial freedom goals.
When looking to invest your hard-earned money, the key features to keep in mind are:
Indians today realise the importance of investing. However, they know they cannot invest blindly – to achieve financial freedom, a person must strategize the entire process. To properly plan for your future goals and needs, it is vital to note the following points:
Many options are available to invest your money, right from equities to mutual funds and Gold. There is also the currency and the real estate market. Hence, you must identify the right investment strategy best suited for your needs.
Multiple investors in the past have held onto the simple belief of ‘buy and hold’ a particular asset. Although this has given good results to many, it is essential to note that the needs and wants of all individuals are different. So you must choose the right vehicle and the right strategy.
Start investing early and set goals
The biggest mantra that all successful people have adopted over the years is that you need to start investing early and set goals. The day you start your earnings is just about the right day to start your investment journey. The more time you give your asset value to grow, the more rewarding the results will be.
Remember to study the market first
There is a parlance in the market that ‘a fool and his money are easily parted.’ Yet many of us do not follow the wise practice of carrying out an extensive market study before making investments. In today’s connected world, information is readily available. You must identify and select the best tools possible to craft an investment strategy. A well-defined strategy helps investors invest their money wisely for optimum returns.
Deciding the quantum of investment
Many of us have the convention of investing the amount left with us at the end of the month. This method often leads to circumstances where there is practically nothing left at the end of the month, and the investment journey keeps getting delayed.
You should allocate money to investments the moment you receive your earnings. To get the most favourable results for your investments, one must adhere to the following points:
Avoid Emotional Investing
Investing should only be done on hard facts – you must do your thorough research and analysis before investing.
The biggest fallacy in investing is acting upon recommendations made by untrusted sources. Social media is replete with accounts of extravagant successes. There are scores of fly-by-night operators who prey on your emotions of greed and easy money and try to lure you into schemes that promise magnificent returns quickly. Don’t get swayed by such stories. It would help if you learned to separate the chaff from the wheat. After all, remember that it is your hard-earned money, and you need to put it to good use wisely.
Significance of diversification
We have always heard the age-old adage ‘not to put all the eggs in one basket.’ Nowhere is this truer than in the financial markets. We have to realise that all financial instruments carry a certain amount of risk. Some are high risk but deliver higher returns.
It is essential to learn to have diversified investments. It will help if you spread your investments across various asset classes. As per a properly laid out plan, allocate your investible money to debt, equity, mutual funds, gold, currency, REITs, etc. Most asset classes go through periodic cycles of rising and falling. A well-balanced portfolio will ensure that your investments remain less volatile and secure to the extent possible.
Understanding the risk of Leveraged Investing
Leveraging has been assigned various names by different market participants. Some have called it a ‘blessing in disguise.’ Whereas others swear that it is the ‘curse of the market.’
Leveraging is when you are using borrowed capital and investing it with an expectation to make higher profits. Professionals have used this tool successfully to better their returns. But as tempting as it may be, it comes with a very advanced level of risk. Markets are very much unpredictable, especially so in the short term.
Once you have set your goals and the timeframe to reach them and earmarked the funds needed, you are primed to start investing. It is now time to select the right investment strategy to fulfil your goals. Various options are available, and as per your risk appetite and style preference, you can implement the best investment policy.
1) Value Investing
For many decades, value investing has been a popular investing strategy. Investors look to buy quality assets available at a good discount and use this strategy for making long-term investments. You can compare this strategy with bargain shopping.
You must remain poised and wait for the strategy to fructify and give results. Warren Buffett, the legendary investor, has always been associated with value investing. His famous words are “Price is what you pay. Value is what you get”.
2) Growth Investing
In this strategy, investors look to buy stocks with tremendous growth potential. Here the investors are looking to lock in on the “next big thing”. But growth investing does not entail reckless investing. Exhaustive market research is needed to identify stocks that are a prospect of being multi-baggers in the future.
One needs to estimate the business’s utility in the coming years. Look for scaling-up possibilities. An important aspect is identifying a company with a good leadership team and a commitment to sustainable governance.
3) Index Investing
Index investing is an excellent option for those not looking to be too much of an active participant in the market. Selecting the right company to invest in involves a lot of market research. Index investing allows you the liberty to not pinpoint and choose a particular company.
If you feel that a particular sector or a group of stocks could generate good returns in the future, you can opt to invest via Index funds. You can invest through certain Mutual Fund Schemes or buy Index ETFs.
4) Active Investing
Active investing is when one is totally in charge of the operations. Here the investors do their market research and select the portfolio for investing accordingly.
Active investing requires a hands-on approach by the investor. One needs to be regularly updated on all market news and happenings. Most importantly, the investor needs to adapt to changing times and regularly balance the portfolio.
5) Dollar Cost Averaging
This strategy involves making regular investments in the market over a long period. Whether stocks or mutual funds, one needs to identify a preferred set of assets. Then a disciplined investing in the vehicles chosen is to be done periodically and without interruption.
The usefulness of this strategy is that the investor does not need to time the market. It is a long-term strategy and requires minimum oversight.
The biggest drawback of this strategy is that investing systematically for the long term becomes challenging for many.
6) Momentum Investing
Momentum investing is where the investors ride the wave. The philosophy behind this strategy is that winners will keep on winning, and losers will keep on losing. So investors of this strategy are attracted to stocks that are rising. Here the idea is to hitch-ride on the stocks with rising prices and hope that they will increase further. An opposite approach of the same strategy is to sell or short-sell a stock as it is falling.
This investing strategy requires a reasonable degree of technical analysis. It is primarily a short-term approach. Investors keep entering and exiting positions based on the momentum of the stock.
7) Income Investing
Income investing involves investing a lump-sum amount in an asset that can keep providing recurring income. Investors look at such income to cover their cost of living expenses, for instance, retirement expenses. Many investors look for investment opportunities that provide a steady income source on a regular and periodic basis. Generally, investors look to invest in dividend-paying stocks, interest-bearing bonds or real estate.
8) Socially Responsible Investing (SRI)
Social awareness and responsibility have increased tremendously in the modern world. The new generation is now more concerned about all social issues and prefers to take a stand on these issues.
Some investors take an extra step forward to align their investments with their beliefs. They prefer to support and invest in companies that promote clean energy or those with broader acceptance of universal participation without prejudice for race, colour or creed.
We have now seen that there are a plethora of investment strategies available. Before selecting the one best suited for your palate, it is crucial to consider the following key questions.
Depending on the answers to the above, you could devise a strategy for your investments. The choice could be a single strategy or even a combination of 2 or more. It would help if you penned down the percentage of funds for allocation to equity, debt and other asset classes.
Investments always have some element of risk involved – some assets could be high risk with high yields. An investor should consider all factors that could affect the sanctity of the investment made. Risk assessment involves:
Mutual Funds have become a prevalent tool for investing in recent times. In 1987, the Government opened up the Mutual Fund Industry in India to allow Public Sector Banks and Insurance Companies to offer Schemes. More particularly, from 1993 onwards, when Private Sector Mutual Fund Companies were allowed to operate in India, the industry saw massive participation from investors.
Mutual Funds can be of the following categories:
Short-term goals are set to meet your expenses and obligations shortly. These are funds required in the next few months to a couple of years. Examples of such goals include:
These are goals for which you need to arrange funds for certain expenses or needs in 2-7 years. The list includes:
Such goals are mostly related to retirement planning or are big-ticket expenses. You could need these in a timeframe of 8 years or beyond. For some goals, even decades of meticulous planning are needed to ensure satisfactory results. Examples include:-
Yes, you must invest regularly and periodically, irrespective of your age. Ideally, the right time to get started is when you start earning. However, you are never late to onboard the bus of investing; hence, you should if you haven’t already started setting money aside for making investments.
There is no need to panic. Investing is not that difficult; it is vital to have your basics-understanding right. We have covered eight different investment strategies to help you get started.