Investing - a challenge in Tough Environment

Investing in a tough investment environment can be a challenge even for experienced investors. That’s why, determining and maintaining the right level of risk tolerance becomes an extremely important aspect of building a portfolio.  Besides, it helps in customizing allocations across different asset classes and selection of suitable investment options for each of the asset classes. Mutual funds can play an important role in this process as they allow investors to allocate investments assets across different fund categories to achieve a variety of risk/reward objectives thereby reducing overall portfolio risk.
Another important aspect is developing a plan and maintaining the discipline to stick to that plan. Therefore, every investment decision has to be a well thought out one and not based on some immediate urge. The key, therefore, is to focus on the fund selection. If you have invested in a good fund from a fund house with a proven track record, most of your worries are taken care of. This decision itself will save you a lot of botheration in the future and ensure success on an on-going basis. Besides, it is equally necessary to have the right mix of funds in the portfolio. Therefore, one should first decide the allocation to each asset class and then select funds for each one of them. By investing in a haphazard manner, one may end up having over exposure to an asset class and that may hamper the chances of success.
If you are looking to invest money in the current environment or looking to rebalance your existing portfolio, you need to follow certain guidelines.
Firstly, you need to be realistic with regard to volatility. In other words, it is necessary to consider the effects of potential downside loss as well as potential upside gain. The right way to manage this is by determining your “comfort level”. However, the key is to adhere to the principles of effective diversification regardless of your accepted level of risk tolerance. Besides, you need to reassess risk tolerance at least annually -- sometimes your risk tolerance may change due to either major adjustments in return objectives or to a realization that an existing risk tolerance is inappropriate for the current situation.[PAGE BREAK]

Secondly, the focus has to be on the investment objective and philosophy of the fund while making the selection.  The investment objective statement of the fund usually indicates whether it will be oriented towards capital gains or income or both. The fund manager also explains his approach to market timing, risk assumption and the anticipated level of portfolio turnover in the Offer Document. Sometimes, funds also indicate internal investment restrictions they have been placed on the fund manager.
For example, the choice between a diversified and a concentrated portfolio strategy will largely depend upon your own risk profile. It is a well-known fact that a well-diversified portfolio enables an investor to spread his investments across different sectors and market segments of the market.
A concentrated portfolio works exactly in the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases one’s chances of underperforming or losing a significant portion of portfolio in a market downturn. Thus, a concentrated port-folio is ideally suited for those investors who have the capacity to shoulder higher risk in order to improve the chances of getting better returns.
Thirdly, it is important to keep the past performance of the fund in perspective. No doubt, a fund’s successful track record can be a positive indicator but it cannot be a guarantee for the future growth at the same rate. For equity part of the portfolio, another important aspect is to have the right exposure to stocks in different market caps. The market cap mix has a role to play in the kind of returns a fund might deliver and the riskiness or volatility that one may have to encounter while achieving those returns. Take help of a professional advisor to decide the allocation as well as select the appropriate funds. However, as an investor you have an important role to play in this process. Therefore, participate actively in the decision making process to have a better control on your portfolio.