Reduce risk and achieve better returns through asset allocation
6 min read
Wealth creation is a long-term process and should not be compromised by the current lifestyle. It is essential to invest in a way that the returns from investments outpace inflation; this is wealth creation, otherwise inflation will erode wealth.
I believe that investing in debt in India is quite comfortable. It is the only asset class where investors invest directly, while every other asset class is of an intermediate nature. It's the safest investment available to investors, although its return is lower compared to other asset classes. However, within the debt category, there are various other investment avenues like debentures. Speaking of debentures, these are interest-bearing instruments issued by corporations with defined maturity. The risk associated with debentures and bonds is primarily the risk of default. Therefore, they offer better returns compared to other available debt instruments. Additionally, when interest rates fall, the prices of bonds and debentures rise, and when interest rates rise, the prices of bonds and debentures fall.
The fundamental rule of wealth creation is to invest in different asset classes, which is asset allocation. However, the risk levels vary across different asset classes, and these risks can be managed by investing in different time horizons. But remember, higher risk often comes with the potential for higher returns. This doesn't mean rushing though. For example, if a young person plans to buy a house in the next 2-3 years, investing a significant portion in equities would entail risk.
The main asset classes for wealth creation are equities, debt, real estate, and gold. Debt carries the lowest risk, followed by gold, real estate, and then equities.
As I've mentioned before, the equity market has become wholesale in nature, so anyone can invest in the market through debt mutual funds. This means that through debt mutual funds, investors can also participate in the equity market. There are various types of debt mutual funds available in the market, each with different risk levels and investment horizons. Some products even allow investment for as little as one day. However, typically investors are advised to opt for debt mutual funds with an investment horizon of more than one year, as it provides opportunities for better returns. The allocation in the debt category depends on various factors, but the most important factor is the investor's risk-return profile and investment horizon. Debt mutual funds can be used to mitigate currency risk. Debt mutual funds can also be used to provide relative stability to portfolios.
Understand that when you invest in equities, you're essentially buying a stake in a business. That's why equity investment should be done for the long term. However, investors in our country often view equities as short-term investments. This is why about 90% of the total business in the secondary equity market segment is in derivatives.
I also believe that investing in equities has become wholesale in nature in the stock market. Therefore, it's difficult for retail investors to research a company. Researching a company requires considerable effort because the growth of any company depends on economic growth prospects, growth prospects in the sector in which the company operates, the company's earnings model, and its expenses and revenues, among other factors.
And this is where mutual funds come as a boon for retail investors. The biggest advantage of mutual funds is that investors get exposure in exchange for a very small amount, and they don't even have to invest directly in companies. Also, mutual funds are tied to the stock market, so if the market, i.e., Nifty and Sensex, is negative, mutual funds will also be negative.
Stability is a factor that should be increased in the allocation of assets as a person's age increases. In fact, as a person's age increases, their ability to take risks in investment decreases. And at the same time, the need for regular income from investments also increases. All such investment needs of investors can be fulfilled through regular investment in debt mutual funds. Also, it should be noted that equity, debt, real estate, and gold behave differently in various economic cycles. However, it is also true that in recessionary or moderating environments, such as the times we are experiencing now, debt asset classes or gold asset classes can outperform other asset classes. We have seen between 2004 and 2008 that in the growth environment, i.e., good times, equities and real estate outperformed other asset classes. In conclusion, I would like to say that successful investing requires having a long-term investment plan, sticking to that plan, and investing in various asset classes. This objective can be achieved through investment in mutual funds. After all, that's what investing in mutual funds is all about. Happy investing!
I believe that investing in debt in India is quite comfortable. It is the only asset class where investors invest directly, while every other asset class is of an intermediate nature. It's the safest investment available to investors, although its return is lower compared to other asset classes. However, within the debt category, there are various other investment avenues like debentures. Speaking of debentures, these are interest-bearing instruments issued by corporations with defined maturity. The risk associated with debentures and bonds is primarily the risk of default. Therefore, they offer better returns compared to other available debt instruments. Additionally, when interest rates fall, the prices of bonds and debentures rise, and when interest rates rise, the prices of bonds and debentures fall.
The fundamental rule of wealth creation is to invest in different asset classes, which is asset allocation. However, the risk levels vary across different asset classes, and these risks can be managed by investing in different time horizons. But remember, higher risk often comes with the potential for higher returns. This doesn't mean rushing though. For example, if a young person plans to buy a house in the next 2-3 years, investing a significant portion in equities would entail risk.
The main asset classes for wealth creation are equities, debt, real estate, and gold. Debt carries the lowest risk, followed by gold, real estate, and then equities.
As I've mentioned before, the equity market has become wholesale in nature, so anyone can invest in the market through debt mutual funds. This means that through debt mutual funds, investors can also participate in the equity market. There are various types of debt mutual funds available in the market, each with different risk levels and investment horizons. Some products even allow investment for as little as one day. However, typically investors are advised to opt for debt mutual funds with an investment horizon of more than one year, as it provides opportunities for better returns. The allocation in the debt category depends on various factors, but the most important factor is the investor's risk-return profile and investment horizon. Debt mutual funds can be used to mitigate currency risk. Debt mutual funds can also be used to provide relative stability to portfolios.
Understand that when you invest in equities, you're essentially buying a stake in a business. That's why equity investment should be done for the long term. However, investors in our country often view equities as short-term investments. This is why about 90% of the total business in the secondary equity market segment is in derivatives.
I also believe that investing in equities has become wholesale in nature in the stock market. Therefore, it's difficult for retail investors to research a company. Researching a company requires considerable effort because the growth of any company depends on economic growth prospects, growth prospects in the sector in which the company operates, the company's earnings model, and its expenses and revenues, among other factors.
And this is where mutual funds come as a boon for retail investors. The biggest advantage of mutual funds is that investors get exposure in exchange for a very small amount, and they don't even have to invest directly in companies. Also, mutual funds are tied to the stock market, so if the market, i.e., Nifty and Sensex, is negative, mutual funds will also be negative.
Stability is a factor that should be increased in the allocation of assets as a person's age increases. In fact, as a person's age increases, their ability to take risks in investment decreases. And at the same time, the need for regular income from investments also increases. All such investment needs of investors can be fulfilled through regular investment in debt mutual funds. Also, it should be noted that equity, debt, real estate, and gold behave differently in various economic cycles. However, it is also true that in recessionary or moderating environments, such as the times we are experiencing now, debt asset classes or gold asset classes can outperform other asset classes. We have seen between 2004 and 2008 that in the growth environment, i.e., good times, equities and real estate outperformed other asset classes. In conclusion, I would like to say that successful investing requires having a long-term investment plan, sticking to that plan, and investing in various asset classes. This objective can be achieved through investment in mutual funds. After all, that's what investing in mutual funds is all about. Happy investing!
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