The Adani Group has been making headlines lately, and people from all walks of life are discussing the company’s issues. Even those who are not directly affected by the company’s troubles have opinions about the government, politics, and other factors involved in the situation. One such conversation occurred in a WhatsApp group that included some of my old school friends.
As the conversation progressed, it moved from Adani to investments. One friend expressed his opinion that investing is not a child’s play, and it requires a professional advisor to manage the investments. However, another friend countered this argument, stating that nowadays, even experts cannot beat the benchmark or index, so what is the point of hiring a professional advisor if one plans to invest in only an index?
After this, other group members shared their stories of being “smart investors.” Some of them spoke about buying the Nasdaq 100 Index when it fell, while others shared their success in adding Tesla to their portfolio at the “right time”. It is interesting to note that most of the members in this group are NRIs (non-resident Indians) who work as doctors or engineers, in different parts of the world.
I did not participate in this discussion because I felt that I had nothing to contribute. If my friends believe that their investment strategies are the best for them, then that is all that matters. After all, they know their lives, goals, and aspirations better than anyone else.
The discussion in the WhatsApp group raises some important points about investing. It is true that hiring a professional advisor may be beneficial for some investors, particularly those who lack the time or expertise to manage their investments. However, it is also true that investing in an index fund can be a viable option for those who prefer a low-cost and passive investment strategy.
Furthermore, the success stories shared by the group members highlight the importance of being informed and making well-timed investment decisions. While no one can predict the future of the stock market or individual stocks, having a basic understanding of investment principles and keeping up with market news can help investors make informed decisions.
After the WhatsApp group discussion on investments, one of my friends who is a Cardiologist in Ludhiana (Punjab) Hospital, and knows about my profession, called me and shared her investment portfolio. She specifically asked if her investments were beating the benchmark, as others in the group had been discussing. She was concerned about whether she was invested in the right products.
As someone who understands the importance of investing, I felt it was my responsibility to guide her as best I could. Investing is a crucial aspect of personal finance management, providing an opportunity to grow wealth and achieve financial stability. However, it’s important to note that investing is not just about earning returns; it’s about balancing the returns with risk associated.
It’s just like prescribing medicines. The ultimate goal is to cure the patient and that too with heavy or light medicines whichever a doctor finds suitable for the person, depending on the health condition. Doctors before prescribing need to understand the patient first. Is he diabetic or having BP issues? Is he sensitive to some specific medicines? Etc.
Now if someone just starts comparing that generic medicines which have low cost can cure well or fast and branded ones are not that effective, it’s not the right approach.
During our conversation, I explained to my friend that focusing solely on beating the benchmark or index is a common mistake made by many investors. This narrow-minded approach can be detrimental to an investment portfolio and financial well-being in the long run. Instead, it’s important to consider other factors such as financial planning, risk management, and goal-based investing to make informed investment decisions.
I discussed the importance of having a comprehensive investment plan. An investment plan should be tailored to an individual’s financial goals and risk tolerance. It should include a diversified portfolio that is rebalanced periodically to ensure alignment with the individual’s goals and risk appetite. Additionally, it should take into account factors such as taxation, fees, and liquidity.
Another critical factor to consider is financial planning. This involves setting specific financial goals and creating a plan to achieve them. It’s essential to consider your overall financial situation, including your income, expenses, debt, and savings, before making any investment decisions.
Risk management is also a very important consideration in selecting Investments. All investments carry some degree of risk, and it’s essential to understand and manage these risks effectively. This involves assessing your risk tolerance, diversifying your portfolio, and considering the impact of market volatility on your investments.
Along with all these, Goal-based investing is also important. This involves aligning your investment strategy with your long-term financial goals. For example, if you are investing for retirement, your investment strategy will likely be different than if you are investing for a short-term goal, such as buying a house.
Finally, it’s essential to understand the products in which you are investing. Before making any investment decisions, it’s crucial to conduct research, seek expert advice, and thoroughly understand the risks associated with the investment product.
Also, as a part of periodic review, it is expected that from March 31, Adani Wilmar will be part of Nifty Next 50 and Nifty 100 indices, while Adani Power will be included in Nifty 500, Nifty 200, Nifty Midcap 100, Nifty Midcap 150, Nifty LargeMidcap 250
Where does benchmark play a role in designing an Investment Portfolio?
It is important for investors to acknowledge that they may not have all the necessary knowledge when it comes to investing. Especially doctors who may have interest in this investing subject, but this should not construe as expertise.
While broad indexes such as the Nifty 50 or Sensex are commonly used as benchmarks, investors should also consider looking at other indices such as Nifty 100, Nifty 200 hybrid indexes, debt indexes, or sectoral indices etc. that may be the benchmarks of those specific schemes and may align with their investment strategy.
When designing an investment portfolio, it is essential to have a mix of different investment strategies and to balance risk accordingly. Financial planning is a critical aspect of successful investing, which involves identifying financial goals and creating a plan to achieve them based on factors such as current financial situation, risk tolerance, investment timeline, and future financial obligations.
Investors must also consider their investment timeline and risk tolerance when designing a portfolio. For example, younger investors with longer investment timelines may be able to afford to take on more risk in their investment portfolio, while investors closer to retirement may prefer a more conservative approach to preserve their wealth.
Risk management is often overlooked when the focus is solely on beating the benchmark. While earning returns is essential, managing risks and protecting one’s investment portfolio from market volatility is equally crucial.
This can be achieved through diversification and asset allocation, spreading investments across different less correlated asset classes, and sectors to minimize the risk of losses in one area affecting the entire portfolio.
Fund houses in active management have their own risk management strategies that help them decide whether to invest in certain stocks or limit their exposure or exit quickly if they are not comfortable with valuations. However, investors tend to overlook the risk management part of active management and focus solely on outperforming the benchmark.
It’s important to note that returns on investments can vary based on different metrics like point to point returns, rolling returns, XIRR, and portfolio returns. So, it’s not always possible to compare the returns of the funds in your portfolio to the benchmark.
A good investor always prefers stable and less volatile returns that benefit from long-term compounding. Goal-based investing is a more effective approach that involves setting clear financial goals and choosing investments that are most likely to help you achieve them.
For example, if your goal is to save for a down payment on a home, you may choose to invest in a fixed deposit or other low-risk investment that provides a stable return. On the other hand, if your long-term goal is to save for retirement, you may choose to invest in a mix of equities and bonds to take advantage of the potential for higher returns over the long term.
By focusing on goal-based investing, you can make more informed investment decisions that align with your specific financial needs and objectives.
In Conclusion:
As more and more investors focus on a limited set of stocks, it becomes increasingly difficult to generate alpha or make money from price variation. This is happening in the Indian stock markets, where institutional investors, research houses, mutual funds, and insurance companies are all researching the same limited set of large cap stocks, making it harder to beat the broad index.
However, it’s important to remember that the investment benchmark may not always align with your personal goals. To design a portfolio that is suitable for your risk tolerance and beats your personal benchmark, you need to have a mix of different investment strategies that cover all market segments, including large, mid, and small caps.
Who knows better than doctors that it is important to take antacid every morning when you are on a heavy medicines diet. Now Antacid prevents the gastric issues which may arise due to these medicines intake, however it does not have any role to play in curing the sickness. Same way its about the formation of a well suited portfolio , and not all the investments in there will be for the same purpose.
While index investing has led to a surge in passive funds, it’s important to stay away from the noise and have a focused investment strategy in place that aligns with your goals and risk tolerance. Compounding will take care of the rest over the long term.
It’s also worth noting that there are now many complicated smart beta funds available, all trying to gain attention from investors’ confusion and desire to get more returns.
However, by focusing on your personal goals and risk tolerance, you can avoid being swayed by the noise and choose investments that are most likely to help you achieve your financial goals over the long term.
