How To Pick Your Investments?

Since 2021, India has witnessed nearly 4x increase in retail investors across the country¹. This growth can hugely be attributed to the rise of new investment opportunities, which can be used to diversify one’s portfolio. But given the abundance of opportunities, it is crucial to pick the ones that work best for you. 

Introduction

There are a number of investment products that one can choose from - from traditional investment avenues such as stocks, bonds and mutual funds to alternative investment options such as commodities and SDI and new-age investments like cryptocurrencies and NFTs. The world of investment has a lot to offer. Anything that is accorded with some value by a group of individuals and that can be bought and sold for earning a profit can be called an investment.

All these investment avenues have different sets of pros and cons. While some are known for their high return potential, others are known for being low-risk and secure investment opportunities. A few simple factors play a deciding role when choosing an investment. These include one’s current financial condition as that will decide the amount of capital that can be invested and, accordingly, the types of investments accessible; risk appetite, which helps in deciding to what extent you’re comfortable in losing your principal investment; and your financial goals and aspirations, which have to be a strategically balanced outcome of the other factors of risk and reward. This is where the 80/20 rule in investment comes into play.

80/20 Rule In Investment

All investment options come with a mix of risks and potential for returns. While some carry higher degrees of risk, others offer a higher possibility of returns. As a result, in a portfolio of multiple investments, it is likely that some will contribute to much of the returns generated while some might fare poorly or even lead to losses. This is where the rule of 80/20 in investment comes in, suggesting that approximately 80% of a portfolio's gains come from just 20% of the investments. This principle underscores the importance of identifying and focusing on the most impactful investments for achieving significant growth.

Before we proceed to look at some of the factors to be considered while choosing an investment, let us understand how compounding works and the importance of timelines in wealth multiplication.

How Compounding Works And The Importance Of Timelines

Albert Einstein famously described compounding as "the eighth wonder of the world." Compounding allows earnings to generate further earnings, leading to exponential growth over time. Compounding allows you to earn interest on the principal amount invested as well as the interest accumulated on a year-on-year basis. This is the reason why compounding works wonders for long-term investors who stay invested for decades, earning returns on their interest income accumulated over such long time frames.

Time is a big factor in investing. Some might even say it’s the most important factor. The time you make an investment, the tenure for which you stay invested, and the time you exit from that investment are all big determinants of your returns.

When it comes to compounding, the usual rule of thumb is that the earlier you start your investing journey and the more time you give your money to multiply by compounding, the higher returns you earn.

Time plays a crucial role in maximising returns over the long term. For example, let’s look at an investor who invests INR 1 lakh in a portfolio at the age of 20, achieving an annual compounded return of 12% CAGR until age 50. The returns in this scenario are as follows:

• Initial Investment (lump sum): INR 1,00,000
• Total Returns: INR 28,95,992
• Total Investment Value (over 30 years at 12% CAGR): INR 29,95,992

In comparison, an investor who makes the same investment at age 30 for a period of 20 years until age 50 will see the following results:

• Initial Investment (lump sum): INR 1,00,000
• Total Returns: INR 8,64,629
• Total Investment Value (over 20 years at 12% CAGR): INR 9,64,629

A 10-year difference results in a remarkable difference of INR 20,31,363 in the final investment value! This clearly illustrates the power of compounding and highlights that starting to invest early is a significant advantage.

Criteria To Choose Investments

Before planning an investment profile, review your investment goals. Divide your proposed investments between cash and fixed-income from alternative investments, securities, and shares (equity). The breakdown of your asset allocation ultimately depends on your risk tolerance and expectation of the returns. A conservative investor may opt to hold 80% of the portfolio in fixed-income and 20% in equity. The reverse could be true for an aggressive investor, while a balanced investor might follow a 50-50 combination.

The deciding factors in making an investment choice stem from underlying factors and investment strategies. Picking the right instruments that suit your risk profile and goals is the key to good returns. Let’s take a look at a few of them.

Underlying Factors

Each investment platform in India needs to be analysed thoroughly as part of the investment filtering process. Some important factors that need to be considered are:

• Tenure

 Evaluate the various investment opportunities in India from the angle of return and growth in the short-term and long-term horizons. 

•  Goal

A clear-cut financial goal for your investments is necessary. Building a corpus for a child’s education, buying a house, planning for retirement, etc, are strong reasons that compel you to delay instant gratification and invest money. 

• Liquidity

Cash is the most liquid investment, but it comes with no return or growth. Some investment opportunities in India, like real estate, may provide higher returns without providing liquidity but with long-term high returns. Keep short-term investments for liquidity and create long- term investments for high future returns 

• Risk 

Risk is arguably the most critical factor when analysing both short-term and long-term investments. However, a choice of low-risk alternative investments on Grip brings steady monthly returns.  Ideal for the appetite of a conservative investor, this investment opportunity invites low ticket-size investment in some of its best products. 

Investment Strategies

Investing your money without an investment strategy is like entering a boxing arena without a game plan. An investment strategy will help evaluate your strong and weak investment performance and draw your focus on low-risk investments, helping you in scaling your investments steadily instead of losing on high-risk volatile investments.   

It is also important to figure out your goals quantitatively. Having a corpus of a certain amount to retire by a certain age is a specific and quantitative investment strategy. 

Try out multiple investment opportunities as diversifying your investment portfolio will help in better wealth creation. Low-risk alternative investments are the trending investments of our time. You can take a look at some of the short-term investment opportunities on Grip. 

• Value Investing

Grip offers commercial real estate and startup equity investments. These could be apt examples of value investing. Your investments mature with time into high returns. However, in commercial real estate investments, you start receiving a quarterly value on the principal. 

• Income Investing

Income investing involves buying securities that generally pay out dividends and return regular fixed income. Bonds, asset leasing, and inventory finance on Grip provide steady monthly returns on your investment. 

• Growth Investing

Growth investors focus on companies that generate above-average growth through revenues and profits. Investing in startup equity through Grip will help you to invest in smaller companies that have a high potential for growth.

• Small-Cap Investing

As the name suggests, small-cap investing involves low-ticket short-term investments for a maximum of 12-36 months. Making monthly returns possible for investors, these investments on Grip yield up to 21% pre-tax IRR. 

• Socially Responsible Investing

Startup investment is a great way of supporting the startup ecosystem. From financing inventory or leasing assets for promising startups, investors earn good returns. This contributes to supporting a healthy startup community through startup equity investments; investors can raise money through crowdfunding to earn high returns. Learn more about these investment opportunities on Grip.

How To Choose The Right Asset Class?

Now that you’re aware of all the criteria for choosing the right investment and the different investment strategies available. It is time to understand how you can choose the right asset class for you.

First, start by identifying your financial goals and aspirations and breaking them down into short, medium, and long-term goals. Secondly, look for investment opportunities that align with your financial goals in terms of their risk and reward profiles. For example, while stocks can offer higher long-term growth, bonds provide stable income.

Once you have catered to the risk and reward side of things and identified investment options accordingly, it is time to consider your investment horizon, meaning the timelines for which you intend to stay invested. For short-term financial goals, safer asset classes like money market funds or bonds might be appropriate. Longer timeframes allow for more risk-taking, making equities and real estate attractive options for capital growth.

Diversification is also key. A well-rounded portfolio that includes various asset classes, such as stocks, bonds, real estate, and cash, can help manage risk. Finally, stay informed about each asset class’s current market trends and performance to make educated decisions, as economic conditions can influence the potential returns of different asset classes.

Alternative Investment

Alternative investments are, as the name suggests, alternatives to the traditional investment avenues of stocks and bonds. These asset classes are known for their low correlation to traditional markets and, hence, are considered a hedge against the risks of traditional investments. Alternatives can be anything from commercial real estate and private equity to collectables like fine art and antiques.

Traditionally, most alternatives have been affordable and accessible only to a handful of rich investors who could afford to invest in such restricted asset classes, however, with the advent of technology and newer models of investing by pooling money, most alternatives are now accessible to the average investor, opening new doors of possibility for diversification, risk minimisation and return maximisation.

Conclusion

Perform a technical and fundamental analysis of all your investments. Evaluate the performance of other potential investments that you wish to invest in. Study them closely until you understand how they work and how they help you reach the financial milestones you have set. Once you are fully convinced, choose the investments that add the right value to your investment portfolio. For guidance on investment plans, visit https://www.gripinvest.in/ to better understand the scope of alternative investments. 

References

1. The Economic Times, Accessed from https://economictimes.indiatimes.com/markets/stocks/news/investors-in-north-india-take-the-equity-plunge-nos-quadruple-in-4-years/articleshow/113307090.cms?from=mdr.

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