Different financial goals demand different investing styles that are in line with the investor’s risk tolerance and returns expectations. We’ve discussed a few major strategies to help you make informed decisions.
Investment advice can’t have the ‘one-size-fits-all’ approach. It’s a fact that every investor has a different risk tolerance, returns expectation and investment goals. As such, an investment style that works for an individual might not be suitable for another investor. Investment style is the approach or strategy used by investors to achieve their unique financial goals.
Depending on the type of goal, the timeframe to meet it and its priority, an investor can adopt his/her investment style. If you’re unsure about what should ideally be your investment style, we’ve discussed a few major strategies to help you ascertain or fine-tune your approach that would help meet your financial goals quickly and effectively.
Value investors look for investment products that are undervalued or available at a price lower than its intrinsic value. For example, suppose the price of a stock is Rs100, but its intrinsic value is Rs150, then a value investor may pick such stock for investment. Value investors look for investments in assets which have lower downside risk and there is a high potential of consistent growth.
The active investing style works on the premise of outperforming the underlying market benchmark by taking high risk and by following the prevailing market trend. For example, if there is a market trend of high growth in the infrastructure sector, an active investor may consider picking stocks, mutual fund schemes, etc. which are related to the infrastructure
sector. Active investors remain continuously involved in the buying and selling of investment products that are in sync with the market trend. This style usually focuses on investments meant for short-term financial goals.
Passive investing, on the other hand, usually refers to investments which are not regularly bought and sold and requires limited involvement of the investor. Such investments are often meant for the long-term. It focuses on a low-risk investment with a low cost of the transaction and a return that’s in sync with the index performance. Passive investing adopts the strategy of buy and hold; therefore, it is more suitable for investors who are looking to invest for the long-term.
Growth investing focuses on the appreciation of capital money. Young investors who are looking for high growth and have sufficient time to remain invested can consider this strategy. Although growth investments have high upside potential, they also carry significant downside risk due to the impact of market volatility. As such, an investor must have a high-risk appetite in order to maximise the benefits of growth investing.
‘INVEST AND HOLD’ STYLE
It is similar to passive investing. The investor puts money in a stock and holds it for the long-term. The investor’s focus usually remains on picking shares at low prices and holding them for the long-term. Investors who want to invest in installments can use this strategy very effectively for equity investments.
An investment may carry various types of risks – be it sector-specific, company-specific, return-specific or even investment class-specific. Diversified investing helps in reducing such risks to a great extent. Diversification can be done by investing money in different schemes or/and different asset classes or/and different sectors to keep the overall risk under control. For example, you can invest in small-cap, medium-cap, and large-cap schemes in the same or different mutual fund companies or you can distribute investment across equity and debt schemes in the same or different mutual fund schemes. Similarly, when investing in stocks, you can diversify the portfolio by selecting multiple companies from different sectors.
However, while adopting this strategy, you must avoid over-diversification as that can reduce the overall returns. Plus, it might be really difficult to monitor so many different varieties of investments.
WHICH INVESTING STYLE IS BEST FOR YOU?
Each investment style has a specific purpose and suitability as per the risk tolerance and returns expectation of the investor. You may use one or more strategies to achieve a particular financial goal. For example, for a major long-term goal that requires a high return, you can use the growth strategy. Whereas an investor can opt for passive investing style for an important goal that requires low to moderate returns and needs to be protected from risk impacts.
Also, an investor’s financial objectives and risk profile change when they near retirement age – things that should mandate a change in investing style too. So, it’s better to have different investing styles to meet different goals and review the strategies from time to time to be able to align them effectively to the demands of those goals.
The author is CEO, BankBazaar.com