Invest For Value, Not Numbers

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

As an investor, you face numerous challenges through your investment time horizon, such as choosing the right mix of assets and investment options as well as ensuring that investments remain on track to achieve your investment goals. Different set of investors work out different strategies to tackle these challenges in their effort to achieve investment goals. However, one of the most challenging aspects that seldom get its due is ‘real rate of return’ i.e. gross returns minus inflation, taxes and costs. Most investors focus on ‘gross return’ and make that the basis of their investment decisions. 

No wonder, traditional instruments like fixed deposits, small savings schemes and bonds or debentures continue to be the mainstay of portfolios of a large section of the investing public in our country. Although these instruments provide guaranteed returns, their returns are low and tax-inefficient. Needless to say, the real rate of return is either bare minimum or negative at times. As is evident, it is absolutely essential to consider factors such as inflation, taxes and costs to improve the real rate of return. Remember, when your investments fail to beat inflation, your money grows only in numbers and not in value.

Let us analyse how these factors impact your returns and how you can minimise their impact on your portfolio. 

Inflation
Inflation is crucial to investing as it reduces the value of your investment returns. Hence, the most challenging aspect is to keep up with the rate of inflation in order to protect the value of investment as well as returns earned on it. The impact of a higher inflation scenario on your portfolio would depend upon its composition. It can be quite a challenge to develop a strategy that not only withstands the turmoil in different market conditions but also help in achieving short-term as well as long-term investment objectives. The key is to focus on the correct asset allocation.

It is equally important to curb your expenditures by budgeting them. By doing so, more money will be available for investments every month. One of the asset classes that have the potential to beat inflation over the longer term is equity. However, investing in equities would mean taking higher risk as compared to some of the instruments that give predetermined or stable returns. Thankfully, there are strategies like systematic investing that can help you in tackling the risk of volatility to a large extent.

Tax Efficiency
Tax efficiency of returns on investment plays a crucial role in improving the real rate of return in the long run. Tax efficiency becomes even more important when you invest to achieve medium-term to long-term investment objectives like children’s education, buying a house and retirement planning. Investment options like mutual funds provide tax-efficient returns. For example, returns from an investment held in equity as well as an equity-oriented fund for 12 months or more are taxed at a flat rate of 10 per cent. For investors in the higher tax bracket, it can make a significant difference when compared with taxation on traditional options wherein returns are taxed at their nominal tax rate. Therefore, you must follow a ‘tax aware’ investment strategy to improve your post-tax returns.

Costs
Not many investors realise that costs relating to an investment in a market-linked product can make a dent in their returns. While the NAVs announced by such products are net of costs, the impact of costs may not be much if you choose your funds well and remain committed to your time horizon. Also, remember that costs have more impact on debt options than equities. As is evident, keeping your focus on earning positive real rate of return can make a significant difference to your financial future. Therefore, it’s time to look beyond traditional options and include market-linked products in your portfolio in a phased manner, if you haven’t done that already