To enjoy consistent success in the financial markets, having a comprehensive investment strategy in place is crucial. It can help you manage your investments better and get you closer to your goals. But what is an investment strategy and how do you formulate one?
Here is everything you need to know about investment strategies, the different types and the factors you need to consider when developing one.
What is an investment strategy?
An investment strategy is a comprehensive plan that helps investors meet their financial objectives. The primary objective of the strategy is to maximise returns while minimising the chances of potential losses.
Contrary to popular opinion, there is no single investment strategy that works for everyone. In fact, the strategy that is ideal for an investor varies depending on factors such as investment objectives, risk profile, time horizon and market conditions, among others. This is one of the many reasons why an investment strategy that works for one investor may not always produce the same results for another investor.
Examples of investment strategies
Let us take the help of a couple of hypothetical examples to understand what an investment strategy is and how it works.
Example 1
Assume you are a 25-year-old individual who has landed their very first job opportunity. Your monthly remuneration is Rs. 50,000, out of which around Rs. 30,000 goes towards meeting your expenses. You wish to invest the remaining Rs. 20,000 to create a corpus for the future.
Since you are young and can afford to take risks, the ideal investment strategy for you would be to invest 50% of your investable capital (Rs. 10,000) in mutual fund schemes that invest in fundamentally strong companies. The remaining Rs. 10,000 could be invested in a dedicated emergency fund, which you can dip into to meet urgent financial requirements without impacting your investments.
Since your investment horizon is very long, even if your mutual funds underperform due to adverse market conditions, you can still recover from the losses and create wealth. In fact, most equity investments have historically performed well in the long run.
Example 2
Let us say that you are a 50-year-old individual with only 10 years left until retirement. Your monthly remuneration is Rs. 1.5 lakh, out of which around Rs. 50,000 goes towards meeting your expenses. From the remaining Rs. 1 lakh, you redirect about Rs. 40,000 to an emergency fund.
You now have Rs. 60,000 left which you wish to invest. Now, since you are no longer young and are close to your retirement, you cannot afford to take any major risks. Also, your investment horizon is comparatively short (near about 10 years). In such a scenario, your ideal investment strategy would be to invest in debt instruments.
Compared to equity, debt instruments are relatively less risky and provide a stable source of income by way of regular interest payments. The interest from such investments could be used to supplement your existing income and could even help you increase the size of your retirement corpus.
As you can see from the two examples above, the investment strategy that is ideal for a 25-year-old individual is vastly different from the strategy that is perfect for a 50-year-old individual.
Types of investment strategies
There are numerous investment strategies that you can use, each with its own set of principles and objectives. These strategies can either be conservative or aggressive by nature.
Conservative investment strategies often focus on capital preservation over return generation and invest in low-risk options like debt instruments and bank deposits. Aggressive strategies, on the other hand, focus on maximising returns by investing in highly risky investment options like stocks, bonds with low credit ratings and derivative contracts.
As a general rule of thumb, aggressive strategies are ideal for investors with a high tolerance for risk and a long investment horizon. Conservative strategies, meanwhile, could be employed by investors with tolerance for risk and shorter investment horizons.
Value investing vs. Growth investing
Value investing and growth investing are two of the most commonly used investment strategies.
Value investing focuses on identifying and investing in undervalued stocks in the market, hoping that they rise in the future to accurately reflect their true value. This investment strategy requires thorough fundamental research and a lot of patience since it may take time for the market to recognise the true value of the stocks.
Growth investing focuses on investing in companies with strong growth prospects, even if they are temporarily struggling financially. This investment strategy is based on the belief that some companies have the potential to grow at an above-average rate over time.
Despite different approaches and appealing to different types of investors, both value and growth investing strategies are proven strategies that have the potential to generate attractive returns in the long term.
Factors to consider when formulating an investment strategy
Developing an investment strategy requires a lot of thoughtful consideration and research. Additionally, you also need to consider a host of factors. Here is an overview of some of the most crucial aspects you need to account for.
- Investment objectives
- Risk profile
- Age
- Available capital
- Financial situation
- Expected returns
- Economic conditions
- Market trends
- Regulatory changes
Conclusion
If you want to achieve long-term financial success, you must develop a comprehensive investment strategy. That said, it is also important to review and adjust your strategy periodically to adapt to changing market conditions and personal circumstances. This way, you will be better positioned to navigate the various complexities of the financial markets without compromising on your wealth creation ability.
But what if you lack the skills or the knowledge to formulate your very own investment strategy? In such cases, you could consider investing in mutual fund schemes. Most mutual funds are professionally managed by experienced individuals who are not only responsible for formulating the investment strategy but also for ensuring that the funds adhere to it.
To check out the list of available mutual funds, head over to the Bajaj Finserv Mutual Fund Platform. Here, you can use the mutual fund compare tool to analyse different funds and pick the one that meets your requirements. The Bajaj Finserv Platform also has a SIP calculator and a lump sum calculator to help you determine the returns you are likely to generate from your mutual
