Investment Lesson

This is a regular question that I get asked at meetings with investors and mutual fund distributors. It is even more common today as markets have moved up to a record high and valuations have pushed significantly higher. This question presupposes that I have the skills to discern the risks in the market. Blessed as I am with a worrying & skeptical nature, I see risks all the time. But, the problem with risk is that the biggest and market disrupting risks are those that I cannot see. Worse they are the unknown unknowns.

Value Investing is dead was the oft repeated conclusion of investors who were being fed by commentaries of the investing community in early 2020. The conclusion was backed by not only short term performance data of 1 to 3 years performance but even looking at performance data of longer period of 10 years of value as style as compared to growth.

The investment horizon plays a vital role in investing. Talking specifically about mutual fund schemes, equity mutual funds may be more suitable for long-term financial goals. Equities may be volatile over the short term but carry the potential of wealth creation over the long term.

Not all asset classes have been winners consistently in the investing world since different asset classes may react differently to macroeconomic events. As such, asset classes like equities, debt, gold, real estate etc., tend to perform in their respective economic cycles.

While equities may perform better during periods of high economic growth, debt may perform better during periods of decreasing interest rate scenario. Similarly, gold may be a better performer when asset classes like equity and debt seem volatile and uncertain, as gold is considered a safer investment option.

When investing in mutual funds, one must choose the mutual fund schemes that best suit their financial goals and risk appetite. In addition, selecting the equity investments basis their market capitalisation is one of the selection criteria, as different market cap segments carry different risk-reward trade-offs.

When it comes to mutual fund investing, investors can choose between actively and passively managed funds. While both aim to provide market-linked returns to the investors, these funds tend to differ on many parameters.

It is always advisable to hold an emergency fund corpus to meet any life contingencies. Such emergency fund should be equal to at least six months' regular expenses one needs to incur, for it provides sufficient financial cushion for any unforeseen situation in life. While maintaining an emergency fund is often on the agenda of many households, many savers keep such funds in the traditional savings accounts.

One of the expectations from fixed income asset managers this time of the year is their annual forecasts on inflation, repo rate or government bond benchmarks. Forecasting typically involves answering the following question: “Given the data we see today, what will be the value of a variable at a period”. It is often said that forecasting exists to make astrology look good.

Green shoots in investor preference seen