Investment Principles for the Thoughtful Investor
As we have seen with previous black swan events such as the 2000 tech bubble collapse, the 2008 GFC (Global Financial Crisis), or the current Covid induced financial crisis, the future is unpredictable. However, how one responds to uncertainty can be planned well in advance. Unfortunately, we see many investors getting swept away with emotions of fear and greed and responding to market noise without proper heed to the relevance of their investments to their financial goals. To survive the market ups and downs and stay on the path to achieving your goals, it’s necessary to have the right mindset and follow certain principles to be a thoughtful investor.
To start with, before one goes out to chasing returns in market-linked or fixed income products, thoughtful investors keep a financial backup or “Emergency Money” ready to see them through 12 months of expenses during times of emergencies. Instead of redeeming from their existing investments and upsetting their financial journey, they park this money in a safe place like a Liquid Fund scheme or a bank savings account to see them through unforeseen circumstances. They are aware that more than chasing returns in a Liquid Fund, it is important for a Fund to qualify as an Emergency Fund, it needs to work on the “SLR” principle – prioritizing safety and liquidity over returns. It needs to give them the flexibility to redeem anytime, just like they would with a bank account. For a Liquid fund to prioritize on safety and liquidity, it needs to have a robust portfolio with minimal interest rate risk. One of the ways he assesses the portfolio is to check the factsheet or the newly SEBI-mandated PRC matrix to evaluate the underlying portfolio and the riskiness of the fund.
Many new investors start their investment journey looking for instant returns. They lack patience or are swayed by what friends and family say. A huge number of such investors burnout in the initial couple of years with losses during market downturns. As per AMFI statistics, 55% of retail investors have a holding period of 2 years or less. While fluctuations may make a short-term investor jittery and lead him to make some poor decisions, thoughtful investors build wealth the long-term way and are more likely to gain from the power of compounding and achieve their goals. When valuations appear expensive, they reduce downside risk by going for a true-to-label value fund that incorporates a margin of safety approach to investing and follows a bottom-up stock selection process and shortlists stocks tuned to grow with market recovery.
A thoughtful investor knows better than letting market movements and macro-uncertainties take control of their emotions. Investors swept with fear and greed end up investing in funds listening to the so-called “advice” of their friends and peers without considering their wealth creation goals. It is critical to make decisions rationally and not let these emotional biases get in the way of our mutual fund investments.
For instance, an investor overcome with greed might chase the top performing schemes in terms of recent returns that ultimately may or may not work in their favour. While rankings and returns could be one aspect of assessing mutual funds, there’s more to the story behind a mutual fund on what is the fund philosophy, the quality of the fund management team, etc.
For instance, an investor overcome with greed might chase the top performing schemes in terms of recent returns that ultimately may or may not work in their favour. While rankings and returns could be one aspect of assessing mutual funds, there’s more to the story behind a mutual fund on what is the fund philosophy, the quality of the fund management team, etc.
A thoughtful investor understands that a lack of foresight on risk and responsibility management eventually translates into lower profitability and valuation in the long return. With that effect, they move beyond chasing bottom-lines and understand the importance of non-financial parameters such as environment, social and governance factors that have a material impact on the future of earnings potential of a company. They invest responsibly using ESG mutual funds. They are aware of companies resorting to greenwashing to gain mileage from the globally emerging ESG investing trend. Among the plethora of ESG funds and ETFs, they look for a fund that walks the talk when it comes to integrity and goes beyond desk-research to offer a 360-degree comprehensive approach to filtering companies. The primary focus they look for is whether the fund portfolio provides exposure to businesses that achieve the triple bottom line – the 3Ps of Planet, People and Profits.
While Gold’s potential for preserving value over the long term is known to all, thoughtful investors are also aware of its portfolio diversifying role that helps minimize downside risks during periods of macro-economic uncertainty. They prefer investing in newer options such as Gold ETFs or Gold mutual funds that does away with pricing markups and locker charges. These financial forms are more liquid and cost-effective. Gold ETFs can be liquidated anytime and do not have any lock-in period. Gold ETFs transfer the benefit of wholesale purchase prices at retail level and additionally, gold mutual funds are GST registered entities, investors do not have to pay the GST differential of 3% when redeeming, improving returns.
Asset Allocation strategy is the process of diversifying one’s portfolio using underlying investments of equity, debt and gold. Instead of chasing that winning asset class or sector, a thoughtful investor keeps things simple by investing using an asset allocation strategy that suits their personal needs. He/she does away with timing the market and sticks to a long-term plan based on such asset allocation strategy. At Quantum for wealth creation in the long run, we recommend the 12:20:80 Asset Allocation Strategy. Here are the building blocks that form this strategy.
- Foundation Block:
Sets aside safe money worth 12 months of expenses in a liquid fund such as Quantum Liquid Fund - Risk Reducing Block:
Resorts to Gold’s risk-reducing characteristics and allocate 20% of their portfolio to the yellow metal through efficient forms such as Quantum Gold Savings Fund and Quantum Gold Fund ETF. - Growth Block:
Diversifies the balance 80% across an equity bucket that is market cap, sector, or style agnostic comprising of Quantum Long Term Equity Value Fund, Quantum Equity Fund of Funds and Quantum India ESG Equity Fund.
A conventional approach to saving and growing one’s wealth might be a fixed deposit. However, more and more investors are realizing the importance of having an option for potentially generating higher returns. Thoughtful investors prefer to keep it simple with a Multi Asset Fund of Funds which gives them the freedom to ride the market volatility with peace of mind. The fund managers follow a regular rebalancing approach within each asset class of equity, debt and gold, on the investor’s behalf, thereby giving them the potential to generate risk-adjusted returns over the long term.
To sum up, let’s see the principles that make a thoughtful investor
| Thoughtful Investor | Not a Thoughtful investor |
|---|---|
| Saves for a rainy day | Withdraws investments when in urgent need of money and upsets financial journey |
| Looks beyond returns for sustainable growth | Chases bottom lines |
| Builds wealth for the long term with discipline and patience | Books short-term profits |
| Looks beyond traditional forms of buying gold such as ETFs and mutual funds | Buys physical gold and end up paying high markups and locker charges |
| Overcomes emotions to make a rational decision | Swept with emotions of fear and greed |
| Diversifies portfolio with a prudent Asset Allocation Strategy | Chases top performing sector or asset class |
| Keeps it simple with a Multi Asset Fund of Funds | Invests in conventional fixed income investments and misses out on real returns |
