The financial markets are ever changing and there is no certainty except that tomorrow will be different. This makes it hard for investors to time the market or to make the best return possible. One of the ideal ways to ensure the returns from the portfolio is to diversify one’s investments.
Ideally, one should have a clear investment goal in mind, and depending on this goal the investment strategy should be formulated. For example, if the goal is to buy a house in 10 years’ time, the investments can be predominantly in equities; however, if the goal is to buy a car in 1 year then there should be more debt than equity to reduce the capital risk.
Once the investment goals are set, the investment strategy should be formulated. This will include not only the asset classes to invest in, but the duration of the investments, nature of risk, tax implications, etc. There should ideally always be some debt investments in the portfolio to ensure some amount of capital protection. Other asset classes such as international funds, or real estate, can also be looked at based on the investment goals and the investable corpus.
One should also keep in mind that the debt markets and the equity markets typically move in opposite directions, with the debt markets benefiting when equities are down and vice versa. Since most investors cannot keep abreast with the flow of financial information that comes through daily, it is advisable to have a monthly review of the portfolio and reallocate the corpus as required.
For example, if the stock markets are doing badly and are expected to continue this trend, it is advisable to shift some portion of the portfolio into debt instruments. It is important to remember that debt instruments are much less volatile with the capital being more or less assured, but result give lower returns. It is always advisable to have at least 20% of the portfolio in debt instruments, and increase this mix if the economy and stock market scenario is bleak, thereby safeguarding your capital.
The best approach to investing in debt instruments is via mutual funds as one can enter and exit at any time and the option of a SIP is there. It is advisable to invest in the debt funds via the SIP route to avoid timing the market and to reap the maximum benefit from compounding of interest.
Debt instruments are one of the best ways to counter financial market volatility as they ensure capital protection and offer moderate returns as well. One should not try to time the market and keep changing the investments in the portfolio but do a monthly or quarterly review and make any changes necessary then.
• Debt instruments can counter stock market volatility
• There should always be at least 20% debt investments in any portfolio
• Invest in debt via the SIP route
• Do a monthly/ quarterly portfolio review and make any asset reallocations then
• Do not try to time the market and keep shifting assets classes
- Anil Rego
(The author is the CEO & Founder of Right Horizons)