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Investment Strategy

Investment Strategy is a set of rules or principles that can help you achieve your financial goals as an investor. An investment strategy should be designed in such a way that it caters to factors such as your risk tolerance, investment horizon, expected returns and the financial goals you want to achieve. ...Read More

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Investment Strategy

Investment Strategy: Meaning, Types, Key factors

Investment Strategies for Financial Success
November 26, 2024

Table of Content

 

What is an investment strategy?

The term investment strategy means a set of principles aimed to help you, as an investor, achieve your financial goals & ensure that your investment portfolio is in line with your set goals, expected returns, and risk appetite. An investment strategy would vary for each individual, depending on their low or high risk appetite, investment horizon (short term or long term) and set financial goals (like retirement or child's higher education corpus). Moreover, after the investment strategy is planned and begins to be executed by you, make sure to review it periodically, such as every year, to ensure your portfolio and strategy remain aligned with your financial goals and performance expectations.

Key Factors to Consider for Your Investment Strategy

Age:

Your age plays a key role in planning the investment strategy. The younger you are, such as in your 20s or early 30s, the higher your risk appetite and longer your investment horizon can be. On the other hand, those in late 40s or 50s tend to have lower risk appetite and smaller investment horizon.

Goals:

Your investment strategy would also depend on what your financial goals are. Someone with the goal of retirement corpus would need a different investment strategy than someone whose goal is to own a home.

Lifestyle:

Your lifestyle too has an impact on how your investment plan gets strategized. If you have a have a conservative lifestyle, you may prefer to stick to a low risk investment option such as bank FD, whereas those who have a more liberal lifestyle may prefer investing in higher risk involving options too, such as stocks.

Financial situations:

Your financial situation too is a factor that is considered when jotting down your investment strategy. If you do not have much liabilities and have higher disposable income, you may invest in diverse instruments and even put some of the amount in high risk assets like stocks. On the other hand, if you already have many liabilities, like home loan and car loan, your ability to financially take risk gets trimmed down.

Personal situations:

Whether you are currently single, married, or already a parent, all this impacts your investment planning. If you have no dependents, you can take a higher risk, whereas if you have dependents who financially rely on you, your overall risk appetite tends to be low to moderate.

Expected returns:

Another key factor is the expected returns from the investment portfolio. If you are satisfied with low returns, such as 6-7%, sticking to conservative options like bank FDs and PPFs can be your way. Or, if you are aiming for higher returns, such as 10-15% or more, consider including real estate, gold, stocks, ULIPs, etc, in your investment portfolio.

Life Insurance Needs:

Consider your life insurance requirements based on your current lifestyle, outstanding debts, and future financial goals for your family. This will help you determine the right balance between investment and insurance components in your overall financial strategy.

Process of Building an Investment Strategy 

For maximizing returns on investment, an investment strategy that involves the following steps is a must:

  • Setting up Financial Goals

Financial goals define the investor’s risk tolerance, desired returns, and time horizon. The first step towards setting up the strategy is to assess your goals. It could be wealth creation, children's education, building a dream home, planning a world tour, generation of regular income, or capital preservation.    

  • Checking Investment Preferences   

Consider the extent of involvement and the asset classes. The various investment options are equity, bonds, stocks, mutual funds, ETFs, automated or managed portfolios, etc. With clarity on preferences and financial goals, the choice of suitable investment products becomes easier. 

  • Making Rules-Based Plans

Execution of a chosen investment strategy involves a set of rules. This includes entry and exit points that are determined by certain stock, economic, and industry criteria.

  • Testing and Tracking the Plan

Back testing or reviewing the product’s past performance helps the investment strategy. Monitoring the investment plan and adjusting the portfolio according to market trends ensures the strategy remains effective.

Types of Investment Strategies

1. Active

An active investment strategy can be suitable if you want to benefit from the market's short-term volatility. However, when using this strategy, keep in mind that the transaction costs associated with trading should not end up being more than the actual money you earn as a profit.

2. Passive

In the case of a passive strategy, you keep a track of the market and your investment, but do not disturb it during the short term. Instead, you remain invested and get to reap the benefits in the long term.

3. Growth

Depending on the existing trend of the stock and its business fundamentals, this hybrid strategy acts on the basis of what the growth potential is. If you expect the company to grow in the medium to long term, you may invest more in its stock and hold it. On the other hand, if you expect the company to deliver significant returns in the short term, you might park your money in its stock for 1-2 years.

4. Value

Under this strategy, the logic is simple. You buy the stock during dips, i.e. when it is undervalued. And when the market corrects, that undervalued stock would grow in value and thus reap good returns when you sell it.

5. Income

This strategy’s focus is to earn money from interest on bonds and dividends. All this gives you a steady cash flow that acts as your additional income from investing.

6. Indexing

Under this investment strategy, you invest money into those stocks which form a part of the indices, such as Sensex and Nifty50.

Evolving Your Investment Strategy with Time

No matter how much research you do while planning your investment strategy, it is always wise to keep reviewing your strategy from time to time and evolve it as and when required. Especially in the medium to long term, while patience is the key, periodically reviewing your portfolio performance and strategy enables you to make any required changes in a timely manner before it's too late. If a strategy has worked well in the past, it may not necessarily work in the future, either. So, if you blindly stick to an investment strategy and do not review it periodically, then you may not be able to achieve your financial goals on time.

Tax Implications Of Investment Strategies*

An important point you must avoid missing out on when jotting down your investment strategy, is the tax implication. Your portfolio’s returns can be harmed despite performing well, if the tax planning is not factored in during investment strategy. On the other hand, adopting the right tax optimisation strategies such as tax loss harvesting and tax efficient investing can lower your tax outgo and protect your returns.

Firstly, tax-efficient investment strategy aims to reduce your tax liabilities by choosing investments as per the investor’s tax slab and investment horizon.

Secondly, tax-loss harvesting implies selling your underperforming investments into a non-tax-advantaged account. This is done to realise capital losses. These losses can then be offset against your gains, hence reducing your overall tax burden.

Besides these tax planning strategies, you must also be aware of the tax rates on your gains from different investments, such as stocks, bonds, gold, real estate, etc. If you do not pay attention to the tax implications, your entire investment strategy can hit a major roadblock and diminish your returns.

Life Insurance and Life Cover in Investment Strategy

Life insurance is a crucial aspect of any comprehensive investment strategy. It provides a financial safety net for your loved ones in case of your untimely demise. Here’s why life insurance should be integrated into your investment strategy:

  • Financial Security:

    • Life insurance ensures that your family is financially secure even when you are not around to provide for them. It can cover everyday expenses, outstanding debts, and future financial needs like your child's education.

  • Peace of Mind:

    • Knowing that your loved ones will be taken care of provides peace of mind, allowing you to focus on other aspects of your financial planning.

  • Tax Benefits:

    • Life insurance policies offer tax benefits under Section 80C and Section 10(10D)* of the Income Tax Act. This not only helps in tax planning but also enhances your overall investment returns.

  • Diversification:

    • Including life insurance in your investment strategy helps diversify your portfolio. It acts as a low-risk component, balancing out high-risk investments like stocks. Savings plan provides guaranteed returns along with life cover. 

Investment Strategies for Different Life Stages

Here are some investment strategies that can be explored as per the different life stages:

  • For Young Investors

The investment strategy for youngsters is to start early in life. Starting as early as 25 gives one a long-term of 35 years, even if one decides to retire at 60. However, if someone decides to begin investing around their 40s, the term is reduced by 15 years straight away. Thus, the burden is higher. 

Investment options like mutual funds, ETFs, listed stocks, etc., are ideal for young investors as they yield high returns and offer the benefits of compounding. Staying invested for longer periods earns higher returns. 

  • For Mid-Life Investors

Following a proper investment strategy is crucial for mid-life investors, as they are running against time. The investment plan cannot be the same for young investors as well as mid-life investors. The reason is that growth in market-related assets needs time. 

These investors have to list out their financial goals depending on what stage of life they are in and plan their investments accordingly. For a disciplined savings approach one can consider mutual funds or SIPs. 

  • For Retirement Planning

Preparing for financial freedom in the future is retirement planning. One of the best investment strategies for retirement planning is to identify retirement goals, assess the money you require, and find ways to increase the value of your retirement savings. Not every retirement planning is the same. One can seek professional guidance to ensure your savings strategy is customised to your individual requirements. 

Prudent investments like PPF, NPS, EPF, etc., when done during your working years for a longer duration, ca help grow your savings exponentially. You also have options like Annuity, Senior Citizen Saving Schemes, etc., to earn returns on your retirement benefits.

 Advantages of a Clear Investment Strategy

The following are the advantages of a clear investment strategy:

  • Helps You Stay Focused on Your Goals

The best investment strategy will enable you to choose investments that align with your goals. If the timelines of your goals are defined, you can appropriate your investments to achieve the goals, whether short-term or long-term. 

  • Lowers the Impact of Market Fluctuations

You can make an informed decision based on the research with an investment strategy in place. You can avoid potential risks by eliminating poorly performing assets. Focusing on assets with great potential growth, adjusting the investments periodically according to the market trend, putting the savings in different baskets to distribute risk, etc., are an integral part of investment planning that will lower the impact of market fluctuations and minimise losses.

  • Increases Your Investment Returns

In contrast to investing unsystematically, an investment strategy based on several factors results in investing in assets with growth potential. Proper investment selection can lead to yields that out beat inflation.

  • Creates Long-Term Financial Security

With an investment strategy, you focus on allocating your savings to assets with growth potential. The planning allows you to balance the returns and losses. The compounding effect in long-term investments provides higher yields, and the reinvestment of returns significantly improves the returns and helps create a robust financial future. In case you have a lump-sum amount you can put your money in an one time investment plan to generate wealth.

When planning your investment strategy, consider the following types of life insurance:

  • Term Insurance:

    • Term life insurance provides a high sum assured at a low premium, ensuring substantial financial cover for your family.

  • Unit-Linked Insurance Plans (ULIPs):

    • Combines investment and insurance. Part of the premium goes towards life cover, while the rest is invested in equity, debt, or hybrid funds.

  • Endowment Plans:

    • Endowment plan offers life cover along with savings. It provides a lump sum amount at the end of the policy term or on the policyholder's death.

Conclusion

Given that there are so many investment options in India to choose from, you can get confused not only regarding which ones to pick but also regarding when to invest in which one. And for how long? If all such questions crop up in your mind, then it is time to make an investment strategy after factoring in your financial goals, risk appetite, investment horizon, etc. Having the right investment strategy in place can help you minimise your overall risk and maximise your investment returns.

FAQs about Investment Strategy

Q. What is the investment strategy?

An investment strategy simply means a set of principles aimed to help investors achieve their financial goals and ensure that their investment portfolio is in line with their set goals, expected returns, and risk appetite.

Q. Which investing strategy is the best?

The answer varies from investor to investor. The best investment strategy for every investor would depend on their life’s goals, risk tolerance, investment horizon, reason for investment, and expected returns. For one investor, the growth investment strategy might be the best, while for the other one, the active investing strategy may work best.

Q. How do I create an investment strategy?

You can create an investment strategy by factoring in your risk appetite (low or high), investment horizon (one year or five years or ten years) and financial goals (like retirement or child's higher education). Consider taking the advice of financial advisors if you are unsure of how to plan your investment strategy. Their knowledge and guidance can help you benefit from an investment strategy that maximises your returns and minimizes risk.

Q. How do I know if my investment strategy is working?

To know if your applied investment strategy is working or not, you need to periodically review the strategy. If your investment portfolio is performing in line with your expectations and the returns are matching your expectations, then your strategy seems to be working. However, if the performance does not match the expectations and your financial goal does not seem to be met with the existing performance, it might be time to change your investment strategy.

Q. Can an investment strategy change over time?

Yes. An investment strategy can change over time, as per the economic and market scenarios, since both are dynamic in nature. Firstly, if the performance of your investment portfolio does not match expectations, you can make changes to your investment strategy. Secondly, since no investment strategy guarantees anything for the future, even if it worked well in the past, you can make changes to your strategy if it is not working in the current economic and market scenario.

Q. What is the golden rule of investment?

The golden investment rule is to diversify the portfolio to balance the risk. Make long-term investments for higher returns and monitor your investments regularly. Invest only to the extent of loss that you can bear and have a disciplined approach.

Q. What are some common mistakes to avoid when developing an investment strategy?

The common mistakes to avoid when developing an investment strategy are lack of clarity on financial goals, misinterpreting risk tolerance, not researching, overreacting to market fluctuations, emotional decisions, not reviewing the strategy regularly, etc. 

Q. How important is diversification in an investment strategy?

The returns on market-linked investments are highly volatile. Diversifying your portfolio can mitigate the risk involved and reduce the severity of market ups and downs. It spreads out the investment risk and balances the financial loss.

Q. What are the differences between active and passive investing?

Active and passive investing differ in their extent of involvement and the inflow. Active investment entails extensive market research and analysis, and portfolio adjustment which involves regular buying and selling. In passive investment, investors plough money into ETFs or mutual funds that require minimal management. 

Q. How can I adjust my investment strategy for different life stages?

To adjust your investment strategy for different life stages, define your goals. Bifurcate them into short-term, mid-term, and long-term goals and allocate the timeline accordingly. The next step is to identify assets that align with your goals. For example long term investments like life insurance plans can help you achieve long term financial goals like child’s education,   

Q. How can an investment strategy help grow my wealth?

An investment strategy helps grow your wealth by balancing the risk with rewards. With proper planning, you will be investing in various assets, distributing the risks, and minimising losses.

 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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* Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

This material has been prepared for information purposes only, should not be relied on for financial advice. You are requested to seek advice from financial advisor for any financial matters.

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