Investing is an arduous exercise, because of the risk associated with each investment avenue and the research that goes into selecting the ones most suitable for you.
Despite the monetary risk, why should you make investments?
To gain returns on investments, of course.
What are investment returns?
The investment return or Return on Investment (ROI) measures returns over a period of time. The investment return value tells the investor whether their investment has been grossing returns more than the investment cost. Investment returns calculate the overall return value.
What are investor returns?
Investor return is the value of the total purchases minus the total sales of the investor’s investments. Investor return also measures how an average investor has fared in the markets.
Investment returns is different from investor returns!
Often it has been observed that average investor returns are quite low compared to the actual investment returns because of what Carl Richards, a best-selling author, calls ” Behaviour Gap.”
Many investors do not stay invested for longer periods in an asset, thus, leading to fewer returns. They invest in an ad-hoc manner and avoid factoring the most basic element, “Risk”.
Risk and returns are two sides of the same coin and directly related? Each investment avenue has a risk, lower the investment risk, the lower are the returns, and higher returns means high risk.
High returns are generated from market-related investment products especially equities as compared to other investment assets (debt and gold).
Let’s look at the investment returns these three friends got after five years, based on each one choosing each asset.
Anurag (a professor), Amol (marketing professional), and Ashok (IT professional) had invested Rs 1 lakh for an investment time horizon of five years.
Anurag invested in bank fixed deposits, Ashok in debt instruments and Amol, the aggressive one of the lot, in equities.
Table: Are you picking your investment avenues wisely?
|Return on investment (%)||Amount invested in 2014 (in Rs)||Amount received after 5 years without considering inflation (in Rs)||Real rate of return (%)|
But if you will notice, with inflation at 8% (the average over the 5 years) the actual rate of return is less. Only equities were able to provide inflation-adjusted returns and Amol benefitted from it
Thus, it would be wise to invest in equities. But did you forget the risk involved? I hope not.
Equity investment carries the highest risk. Hence one should not go overboard and invest in equities; do it taking cognisance of the asset allocation best suited for you.
By investing in mutual funds, you gain more if invested prudently.
So, as an investor avoid…
- Ad-hoc investments by following some investment expert, friend or neighbour, and free advice;
- Investing without a proper goal-based financial plan;
- Investing without assessing risk profile;
- Timing the market;
- Being biased towards investments or be emotional;
- And, being impatient to see the growth immediately in the invested amount.
What should you do instead to improve the returns on your investments?
- Create a goal based financial plan (include short term, mid-term, and long-term goals such as retirement)
- Have an investment strategy according to your financial status and risk appetite.
- If unable to devise an investment strategy, seek advice from an experienced, unbiased and ethical financial advisor.
- Have a disciplined approach towards investing via SIPs in direct plans.
- Be devoid of emotions (panic selling, following herd, or showing biasedness) when managing your portfolio.
- Review your investment portfolio as per the changes in the financial status or economic conditions.
- Do not completely rely on the advice of an expert; at the same time, carry out your own research.
To gain more returns, an investor must stay invested for a longer time period and take prudent decisions that give them consistent returns. Don’t follow what your next-door neighbour or friend does; investing is an individualistic exercise. Hence, plan and invest as per your risk profile, time horizon, and portfolio review should be done to weed out the duds. This will ensure that you can clock an optimal rate of return and achieve your envisioned financial goals.
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Author: Aditi Murkute
This article first appeared on PersonalFN here
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.