New to investing? Here’s how you can formulate your strategy

7 MinsJune 03, 2020

Ever since the outbreak of the novel Coronavirus, the Indian equity market (the S&P,BSE,Sensex), has been on a rollercoaster ride. In general, it has been a challenge to earn respectable returns. On the contrary, investors have witnessed wealth erosion over the last few months. For newbies equity investing has been such a tumultuous experience and they are perhaps saying, “Cash is King”. But irrespective of whether it is a volatile market or not, if you are new to equity investing, here are some steps you can follow to devise a sensible and solid investment strategy:

investment strategy

  • Hold ‘optimal’ cash – neither too much nor too little – for your necessary monthly expenses and emergency purpose. For the latter, you may hold 12 to 24 months of regular monthly expenses, including EMIs on loans, in a separate savings bank account and/or a Liquid Fund or Overnight Fund.
  • Set your asset allocation right i.e. how much money you park in equity, debt, and gold (akin to placing eggs in different baskets).
  • To optimally set your asset allocation, consider your age, income & expenses, assets & liabilities, investible surplus, risk appetite, the broader investment objective, financial goals, and the time in hand to achieve those envisioned financial goals.
  • Set realistic return expectation and do not get carried away by past returns.
  • Prudently diversify your investment within each asset class (equity, debt, and gold) to reduce risk. But take care not to over-diversify, because it yields no extra benefit beyond a point, on the contrary, adds to the hassle of managing a bulky portfolio.
  • Look at the silver lining amidst the challenging times, and be on the search for appropriate investment opportunities. Make volatility your friend; do not get petrified by it.
  • To plan for long-term goals (more than 3 years away), SIP into worthy and suitable mutual funds. While for the short-term goals (less than 3 years), consider recurring deposits and short-term deposits.
  • To achieve the envisioned goal, keep investing. If you stop in between, it will apply brakes on the power of compounding and inflation could end up eroding the purchasing power of hard-earned money.
  • If you already have an investment portfolio, review it comprehensively, preferably with the help of an expert. Do not take investment decisions (buy, hold, or sell) in an ad hoc or unscientific manner, which may do more harm than good. Similarly, do not base the investment decisions going by what your next-door neighbour, colleague, friend, relative, etc. does with his/her portfolio. Keep in mind, investing is an individualistic exercise. There is no“one-size-fits-all approach”.

[Also Read: Balance your Financial and Physical Assets]

Investing in equity funds

If you are young, earning well, have financial goals that are far head (3-5 year or more), and in general, willing to take the risk; then you should invest in the equity market via equity-oriented mutual funds. Structuring the portfolio strategically and scheme selection is the key. If you have a time horizon of at least five years or more, have a mix of multi-cap, large-cap, mid-cap and small-cap equity funds in your portfolio. You could also include aggressive hybrid funds.

As regards, the approach, you could do staggered lump sum investments and/or Systematic Investment Plans (SIPs). SIPs instil the good habit of regular & systematic investing, are lighter on the wallet, and will make timing the market irrelevant.

Remember, equity investing is for the long-term. So, if you have not been able to build wealth satisfactorily in the short-term or have witnessed wealth erosion, do not get upset or disturbed as long as you are holding some of the best and suitable equity-oriented mutual funds. The losses could be temporary; give your investments sufficient time to grow.

Investing in fixed income

If you are risk-averse by nature or have financial goals to fulfil that are not too far away (less than 3 years); you may consider debt funds. When you choose debt mutual fund schemes, prefer the safety of principal over returns. Debt funds that invest in sovereign government securities are good options. For instance, you could consider Liquid Funds that invest in securities of up to 3 months duration and Overnight Funds that invest in papers having one-day maturity.

To select the best Liquid Funds in 5 minutes. Do not forget debt funds earn market-linked returns and aren’t risk-free. Hence, one needs to be extremely careful when approaching debt mutual funds.

To earn secure and steady returns, invest in a bank fixed deposit. To maximize the returns on a bank FD, choose your investment plan (monthly interest pay-out or a quarterly interest pay-out plan or cumulative) and the term of the FD -- short-term or long-term -- thoughtfully, ideally considering your liquidity needs and financial goals. Axis Bank offers best in the class interest rates on bank FDs for both, long and short-term investments.

Investing in gold

Apart from the above, buy and hold gold tactically. As long as global uncertainty prevails, gold is expected to exhibit its sheen and prove its trait of being an effective portfolio diversifier, a safe haven, a hedge (when other asset classes fail to post alluring returns), and does command a store of value. Therefore, allocate around 10-15% of your entire investment portfolio to gold and hold it with a long-term investment horizon. Invest in gold digitally through Sovereign Gold Bonds, Gold ETFs or Digital Gold. This is an easy and convenient way to diversify your portfolio without having to worry about fluctuating gold prices or how to store physical gold. Even if you want to sell gold, Digital Gold or paper gold is easier to sell than physical gold.

Take advantage of tax-saving instruments

Reducing your tax impact is also a way to save money. Since there is an option to choose between the Old and New Tax Regimes from this financial onwards, calculate which regime is most beneficial for your salary segment. Accordingly, you can select tax-saving instruments such as Equity Liked Savings Schemes or Tax-saver Bank Fixed Deposits. Include them in your equity and fixed income investment portfolios respectively and allocate funds at the beginning of the financial year to get maximum advantage. While investing also consider the lock-in period of these instruments. For instance, ELSS funds have a three-year lock-in while Tax-saver Bank FDs have a lock-in period of 5 years. You can also invest in Public Provident Fund, especially if you are just starting out in your career since it has a lock-in period of 15 years. It is also the only tax-saving instrument that offers the benefit of tax benefit during initial investment, interest accrual and at maturity.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.