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7 investment tips to improve your returns

Published on Mon, Jul 24, 2006 at 17:43 | Source : Moneycontrol.com

Updated at Mon, Jul 31, 2006 at 20:18

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Equity funds, if selected in the right manner and in the right proportion, have the ability to play an important role in achieving most long-term objectives of investors in different segments. While the selection process becomes much easier if you get advice from professionals, it is equally important to know certain aspects of equity investing yourself to do justice to your hard earned money. Knowing them and by using them in the selection process can make a big difference to the end result. Here are some important investment guidelines:

Know your risk profile:

Before you take a decision to invest in equity funds, it is important to assess your risk tolerance. Risk tolerance depends on certain factors like emotional temperament, attitude and investment experience. Remember, while ascertaining the risk tolerance, it is crucial to consider one's desire to assume risk as the capacity to assume the risk.

It helps to understand different categories of overall risk tolerance ie conservative, moderate or aggressive. While a conservative investor will accept lower returns to minimise price volatility, a moderate investor would be all right with greater price volatility than conservative risk tolerances to pursue higher returns. An aggressive investor wouldn't mind large swings in the NAVs to seek the highest returns.

Though identifying the desire for risk is a tough job, it can be made easy by defining one's comfort zone.

Don't have too many schemes in your portfolio:

While it is true that diversification helps in earning better returns with a lower level of fluctuations, it becomes counter productive when one has too many funds in the portfolio. For example, if you have 15 funds in your portfolio, it does not necessarily mean that your portfolio is adequately diversified. To determine the right level of diversification, one has to consider factors like size of the portfolio, type of funds and allocation to different asset classes. Therefore, it is possible that a portfolio having 5 schemes may be adequately diversified whereas another one with 10 schemes may have very little diversification.

Remember, to have a well-balanced equity portfolio, it is important to have the right level of exposure to different segments of the equity market like large cap, mid-cap and small cap. In addition, for a decent portfolio size, it is all right to have some exposure in the sector and specialty funds.

Longer time horizon provides protection from volatility:

As an equity fund investor, you need to understand that volatility is an integral part of the stock market. However, if you remain focused on the long-term objectives and follow a disciplined approach to investing, you can not only handle volatility properly but also turn it to your advantage.

Understand and Analyse "Good Performance":

"Good performance" is a subjective thing. Ideally, to analyse performance, one should consider returns as well as the risk taken to achieve those returns. Besides, consistency in terms of performance as well as portfolio selection is another factor that should play an important part while analysing the performance. Therefore, if an investment in a mutual fund scheme takes you past your risk tolerance while providing you decent returns, it cannot always be termed as good performance. In fact, at times to ensure that your investment remains within the parameters defined in the investment plan, you may to be forced to exit from that scheme.

In other words, you need to assess as to how much risk did the fund manger subject you to, and did he give you an adequate reward for taking that risk. Besides, you also need to consider whether own risk profile allows you to accept the revised level of risk

When to sell your fund?

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