Looking forward to 2013? Here are some lessons from 2012
If you are planning your investments for 2013, make sure you don‘t commit the same mistake again of going majorly with the best performing asset class and ignoring others completely.
The Mayans predicted that the world will end on December 21, 2012. However, the fact that all of us are still alive confirms that things always do not turn out as expected. This is what investors experience in the financial markets time and again. The year 2012 was no different.
First, the year turned out to be a good one for equities, contrary to the expectations at the start of year. While the Nifty zoomed up by around 21 percent, the average return from multi-cap equity funds has been around 25 percent. Second, gold was expected to continue its ascent in 2012, but disappointed with a meager return of around 7 percent. Third, income funds gave an average return of around 10 percent during the year.
There are a few lessons for investors here. If you are planning your investments for 2013, make sure you don’t commit the same mistake again of going majorly with the best performing asset class and ignoring others completely. In fact, the lessons learnt from 2012 can be your guiding factor in working out the investment strategy for the year ahead. Remember, taking the time in the beginning would mean that you have more to keep in the end.
Don’t follow the herd
While it can be quite tempting to do what everyone else is doing, most of the times it backfires. Remember, all of us have different time horizon, risk profile, requirements and temperament. Therefore, the right way to invest is to follow an asset allocation model based on these factors. This needs to be followed irrespective of the fact whether you are investing in a rising, falling or in a volatile market.
Most investors shunned equities during 2012 as the expectations were quite low. While their disenchantment with equities could be attributed to extreme volatilities over the last couple of years, shunning an asset class like equity completely can be detrimental to their financial progress in the long run.
Similarly, although gold failed to shine during 2012, it still continues to be a good hedge against inflation in the long run. The key, therefore, is to have your asset allocation right and maintain it by rebalancing the portfolio periodically. Ideally, it can be done once a year. This rebalancing process will not only ensure that you protect the gains made from the good performance of an asset class but also continue to remain invested in it at all times.
Don’t try to time the market
Most investors expected the stock market to touch much lower levels then it actually did in 2012. However, a slew of reforms announced by the government such as reduction in subsidy on diesel, disinvestment in certain PSUs and FDI in retail help the stock market move at much higher levels. In fact, as the markets started doing well, hordes of investors decided to exit considering it to be a good opportunity to either book profits or pull money out of equities without any losses.
In the process, many investors remained on the sidelines and hence missed out an opportunity to allocate a part of their portfolio to equities. In all probability, they will either find it difficult to enter the market now or end up investing at much higher levels than they could have if they had continued with their investment process as per their asset allocation.
Don’t ignore tax efficiency of returns
Investors often move money out of the market related investment options during prolonged spells of volatility and look for shelter in traditional investment options like FDs, NCDs and small savings schemes. This was evident throughout the year 2012. Needless to say, the major attraction for investing in these instruments is guaranteed returns. However, the tax efficiency of the returns is ignored. If you are a tax payer and have been following this practice, it’s time for you to rethink your investment strategy.
Considering that debt instruments offer lower returns and inflation eats into a substantial part of returns over the years, tax efficiency of the investment options plays a crucial role in improving the real rate of return in the long run. While tax efficiency alone should not drive the investment strategy, it can make a substantial difference to your portfolio’s ultimate size. In other words, tax efficiency has to be an essential element of your investment plan along with portfolio mix, investment philosophy and management.
Therefore, to plan for the year ahead in the right manner, take a close look at your existing asset allocation. If required, don’t be afraid to realign it to suit you requirements. Also, review your insurance portfolio. Make sure, you are adequately insured. If you have been following a strategy of mixing your investments with insurance and have accumulated a number of policies, it’s time to change that. It’s not the number of policies but the quantum of risk cover that should matter to you. Remember, a term insurance plan is an ideal product to reduce your costs and to ensure adequate risk cover.