Make Rational Investment Decisions

Investors have to make two important investment decisions during their defined time horizon, i.e., when to buy and when to sell. While a disciplined approach that propagates regular investments can take emotions out of investment decisions and help investors tackle most of the issues relating to timing and how to invest, deciding when to sell can be a tricky one. That’s why it is very important for investors to have a clearly defined time horizon as it helps in avoiding abrupt selling decisions. [EasyDNNnews:PaidContentStart]

In the absence of a defined time horizon, many investors panic whenever they are faced with bouts of volatility. As a result, they either sell in haste or stop making fresh investments, thinking that markets can go down further. In both these situations, they ignore the need to maintain their asset allocation. In other words, both these strategies expose them to different types of risk. Not investing during market downturns makes investors miss opportunities to invest at lower levels and bring their average cost down. Therefore, it’s absolutely necessary to have a strategy in place to make selling decisions. 

One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which you can bring your asset allocation back to the original level. Rebalancing is necessary because every portfolio is designed to achieve the desired results at an acceptable level of risk. By doing nothing, you will violate this premise and get exposed to higher risk. However, rebalancing should be done only when the exposure level deviates by 10 per cent or more. 

Another important aspect that can help you make the right selling decisions is to assess the performance of the portfolio properly. While every investor expects a decent and consistent performance from the portfolio, it can be tricky to figure out whether it is actually happening or not. 

Investors often get disillusioned by the negative returns of equity funds. However, negative returns from a portfolio can’t always be attributed to its poor performance. For example, even a quality portfolio is likely to deliver negative returns during market downturns. Similarly, even a mediocre portfolio can deliver decent returns when the markets are doing well. Therefore, you must focus on long-term performance and not base your investment decisions on short-term performance. 

Besides, you need to assess the performance in the right manner. For an equity fund, you could compare its performance with the benchmark as well as the peer group. A comparison with the peer group is important because many a time a particular category of funds may either outperform or underperform the benchmark. In such a scenario, the peer group comparison helps in identifying whether it is worth remaining invested in the funds. Considering that SEBI has clearly defined the categories for equity, hybrid, debt, solutionoriented funds and others, the comparison with the peer group can be done very effectively. 

Consistency in performance is another key factor. Beta of a fund indicates how much it will rise or fall in relation to the changes in its benchmark index. If the fund has a beta of 0.95, it represents that the fund will go up (or down) by a factor of 0.95 for every 1 per cent change in the benchmark index. The consistency in returns is measured by standard deviation. 

Another key element in this process is total return. Total Return variant of an Index (TRI) takes into account all dividends/interest payments that are generated from the basket of constituents that make up the index in addition to the capital gains. Hence, TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes. 

In 2018, SEBI mandated the use of TRI for evaluating the performance of the mutual fund. Mutual funds disclose their performance based on the Total Return Index rather than the Price Return Index, which only considers capital appreciation.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]