Investment Strategy: Meaning, Types and Factors to Consider

2024-12-20

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Putting all your money into a single financial instrument is too risky. Investing money hoping to get rich quickly is another misled thought process. Both these tactics rely on luck rather than sound financial prudence. So, a good investment strategy should yield adequate returns without creating any short-term or long-term hardships in cash flow.

An investment strategy is a broad action plan which defines the risk-return placement for the investment.

The investment strategy for you may focus on increasing your wealth by investing in different asset classes for predefined periods.

However, for investment managers and fund managers, the investment strategy can range among the following:

Beating a benchmark portfolio like the Nifty 50
Investing for portfolio growth in sector stocks
Generating monthly income for investors through stocks or bond investments
Minimum capital protection while investing in equity markets
Maintaining a fixed ratio of equity and debt assets in the portfolio
Investing in Index stocks passively, also called Replication of Index

Your portfolio strategy brings a sense of discipline to your investing activity and helps you make faster decisions. Staying clear of the noise in the market and remaining calm is the first prerequisite of any investment strategy.

For individual investors, the investment strategy has to be one of the following three types:

Growth Strategy: Focuses on the growth of investments but may compromise on liquidity and taxes
Preservation Strategy: Focuses on capital safety from market risks, inflation and taxes
Distribution or Income Strategy: Generates regular income, can invest aggressively or safely

Key Takeaways

Investing all your money in one place is risky. You should spread your investments across different assets and investment plans to balance risk and returns.
Investment strategies can differ for every individual based on their personal financial goals and risk appetite.
Your age, income, financial goals, and risk tolerance are factors that should guide investment decisions.
A well-defined investment strategy helps avoid emotional decisions and market noise, ensuring long-term success.
Timely reviews of your investment portfolio help you stay on track and make necessary changes based on life stages and market conditions.
Tools like ULIPs, PPF, and NPS offer tax benefits and hassle-free investment management for long-term financial growth.

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Factors to Consider for Your Investment Strategy

Investing is one of the proven and effective ways to accumulate wealth and achieve your goals. There are various investment options available, and how you diversify your investment depends on several factors. Here are some of these key considerations:

Age: Your age can greatly influence your investment choices and decisions. If you are in your 20s or early 30s, you have sufficient time to invest your money and recover from market fluctuations, allowing you to take more risks. On the other hand, as you reach your 40s and 50s, your focus moves towards safer investments with stable returns to protect your wealth.
Investment Goals: Your financial goals play a huge role in helping you understand how you should structure your investment strategy. If you are saving for your retirement, you can opt for long-term investments that provide stable growth. Meanwhile, if you wish to buy a house in the future, you may prefer lower-risk options to ensure capital preservation.
Risk Appetite: Risk appetite refers to how much risk you are willing to take with your investments. If you are comfortable with changes and potential short-term losses, high-risk investments like stocks and mutual funds might be suitable for you. On the contrary, if you’re aiming for stability, safer options like fixed deposits and bonds might be better.
Lifestyle and Financial Situation: Your current lifestyle and financial situation play a major part in your investment planning. If you have fewer financial obligations and a steady income, you can put your funds towards high-growth investments. However, if you have several liabilities like home loans or a family to support, you may need to prioritise safer investment avenues.
Expected Returns: Each investor has their own return expectations. If you are looking for conservative growth with minimal risk, investments like FDs, PPF and debt funds may be ideal. If you want higher returns, you should consider investing in stocks, real estate or other high-return assets. It is important to balance risk and return to create a portfolio that aligns with your goals.

Types of Investment Strategies

Any wealth creation requires proper planning, due diligence and utmost patience. Sticking to the plan is quintessential unless, of course, extraordinary circumstances warrant a deviation from the original, well-thought-out plan.

To understand what is investment, here are some of the recommended types of investment strategies are listed below:

Active: If you want to take advantage of short-term volatility in the market, an active strategy works best. However, keep the transaction costs in mind. The costs, of trading, should not exceed the money made from trading in stocks.
Passive: In this case, you keep an eye on your investment but don’t touch the money in the short term. You will reap better benefits if you stay invested. In contrast to active strategy, here you believe that you cannot beat the market in the short-term and, therefore, prefer staying invested for the long haul.
Growth: This is a hybrid strategy depending on the trend of the stock and the underlying business fundamentals. If your calculations foresee a company growing in the medium to long run, you may like to invest your money to build a corpus. On the other hand, if you foresee a company delivering good returns in 1-2 years, you may park your money for the short term.
Value: Investing based on price-to-book value gives an intrinsic view of the stock and how it would fare when there is a market correction. The underlying logic is simple. Buy when the stock is undervalued during dips. When the market corrects, such undervalued stocks will grow in value. You will reap rich returns if you sell at that point.
Income: The focus here is on earning money from dividends and interest on bonds. If you are looking for steady, predictable and sustainable cash flows, an income-targeted investing strategy works best.
Indexing: In this strategy, you invest money in stocks that are part of the indices. For example, NIFTY50, NIFTY BANK.

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Investment Options with Automated Strategies in India

Look at some investment options wherein you can either pre-define the investment allocation across equity, corporate bonds, government securities and debt funds.

Unit Linked Insurance Plans (ULIPs): ULIPs are solid investment options because you can choose to put your money in diverse funds without much manual intervention:
- The Systematic Transfer Option (STO) and Automatic Fund Rebalancing (AFR) ensure you complete automation and peace of mind.
- Early exposure to equity can help you generate wealth
- When you inch closer to retirement, the money can move to debt instruments to preserve capital
- The returns from ULIPs are exempt from tax under section 10(10D) which means you save on taxes as well
- ULIPs have an insurance component as well as an investment component. ULIPs allow milestone-based withdrawals.
Public Provident Fund (PPF): PPF is a long-term regular investment option which offers the safety of capital and growth:
- Public Provident Fund and offers a fixed rate of interest (7.1% p.a. as of 1st January 2022).
- You can invest up to Rs 1.5 lakhs each year and earn compounded interest without any intervention from your end.
- The amount deposited in PPF accounts is deductible, under Section 80C, from taxable income, whereas all withdrawals are exempt from taxes. So, you save on taxes as well.

National Pension Scheme (NPS): NPS is a long-term savings scheme with a focus on the retirement goal. The scheme allows you to:
- Allocate money into equity, bonds, government securities and alternate funds as per your discretion or choose an automated portfolio.
- Investments in NPS are exempt from taxes both at maturity and annuity (up to 40%) stages.
- Contributions to NPS are deductible, under sections 80C from taxable income. You will save on taxes here as well.
- NPS follows the growth strategy and you can withdraw and invest 60% of your corpus in annuities for regular pension.

Change Your Investment Strategy with Time

Investment requires a clear-cut action plan with periodic reviews. Diversifying investments across asset classes and instruments is a time-tested, proven strategy. Patience is key in investing. The duration of investment depends on several factors that impact your circumstances.

Adopting the right investment plan will give you a solid footing on your way to financial freedom and relieve you from financial stress. However, you need to revisit your investment strategy from time to time.

How to Build an Investment Strategy?

To build an investment strategy successfully, you need to keep these things in mind:

Setting Financial Goals:

Your investment planning starts with defining your financial goals clearly. These goals help determine your risk tolerance, expected returns, and investment timeline. No matter your goal, be it creating long-term wealth, buying a house, funding a child's education or generating regular income, setting well-defined objectives helps in sharing your investment approach.

Understanding Your Investment Preferences:

Before investing, consider your level of involvement and the types of investments that suit your needs. Investment options can range from stocks, bonds, and mutual funds to ETFs and managed portfolios. Understanding your choices and aligning them with your financial goals will help you decide the right investment products.

Creating Rules-based Plans:

A strong investment strategy should ideally follow a structured plan with predefined rules. These rules guide you on when to invest, when to leave, and how to react to market changes. By setting criteria based on economic conditions, stock performance, or industry trends, you can invest in a disciplined way.

Testing and Tracking Your Strategy:

To ensure that your investment strategy remains effective, you must regularly review and track your investment performance. Analysing past trends and adjusting your portfolio in response to market conditions can help you maximise returns while managing risks. Through continuous monitoring, you can refine your approach and stay aligned with your financial goals.

Investment Strategies for Different Life Stages

Here are certain investment strategies catering to different life stages that you can consider:

Young Investors: Starting early is one of the most suggested smart investment moves that investors recommend. If you begin investing when you are in your 20s, you get decades to grow your portfolio, take advantage of compounding, and recover from market fluctuations. This is because the longer you wait, the shorter your investment horizon will be, making it harder for you to gather significant returns.

Being a young investor, you can even explore high-growth options like mutual funds, exchange-traded funds (EFTs), and equities. Since you will have time on your side, you can afford to take higher risks for potentially better returns. Being consistent in your investment will ultimately help build substantial wealth over time.
Mid-Life Investors: Since investors in their 40s and 50s have a shorter timeframe before their retirement, their strategy should balance growth with stability. Unlike young investors, they cannot rely solely on high-risk assets as they need to save capital while still growing their wealth.

At this stage, it is crucial to define your financial goals like funding your child’s education, paying off a mortgage, or preparing for your retirement. Investing in mutual funds through a systematic investment plan (SIP) can provide disciplined savings. Also, diversifying into bonds, FDs, and balanced funds might help maintain financial security.
Retirement Planning: Retirement planning is very important to ensure financial stability in your later years. To curate a good investment plan, you must identify your post-retirement financial requirements, assess how much you will require, and choose investments that will help grow your savings.

Long-term investments like the National Pension System (NPS), Public Provident Fund (PPF), and Employee Provident Fund (EPF) can help you gather a substantial retirement corpus. Once you retire, options like annuities and Senior Citizen Schemes (SCSS) can provide regular income to ensure a comfortable retirement. If confused, you can simply get help from a professional to get advice and build a strategy that suits your particular needs.

Tax Implications of Investment Strategies

Now that you have a decent understanding of what investment planning is, it is also important to understand its tax implications. Even if your investments perform well, not considering tax implications can greatly reduce your overall returns. On the other hand, smart tax planning can help you optimise your earnings and reduce your tax burden.

A tax-efficient investment strategy must focus on minimising tax liabilities by selecting investments based on your tax bracket and the duration you plan to hold them. Choosing options that help you save tax and structuring your portfolio accordingly can help maximise your post-tax returns.

Another approach is tax-loss harvesting, where you can sell your underperforming investments in a taxable account to realise capital losses. These losses can then be used to offset gains, effectively reducing the tax amount you owe.

Moreover, it is important to understand how different investments are taxed. Stocks, bonds, real estate, and gold all have different tax rates that affect your profits. Without proper tax planning, you might face unexpected tax liabilities that eat away at your earnings. By considering these implications from the beginning, you can create a well-balanced investment strategy that protects and improves your returns.

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Examples of Investment Strategies

To better understand what is an investment and how it works, here are some simple examples:

Example 1: Long-Term Equity Investing

Let us assume Anuj, a 27-year-old professional earning ₹60,000 per month. After covering his monthly expense of ₹35,000, he has ₹25,000 left to invest. His goal is to build long-term wealth, and since he has a long investment horizon, he can afford to take higher risks.

A suitable investment strategy for him would be to allocate a significant portion (say ₹15,000) into equity mutual funds that invest in companies with strong growth potential. The remaining ₹10,000 he can direct into an emergency fund to ensure financial security.

Since equities tend to perform better than other asset classes over the long run, staying invested despite short-term market fluctuations can help Anuj generate substantial wealth. Even if there are periods of volatility, his long investment horizon will help him recover losses and benefit from market upswings.

Example 2: Short-term Bond Strategy

Now, let’s consider 55-year-old Sunita who is just five years away from her retirement. With a monthly salary of ₹2 lakh and monthly expenses of ₹75,000, she has ₹1.25 lakh left for investment. Given the short time frame and need for financial stability, taking high risks is not advisable for her.

In this scenario, a short-term bond strategy could be ideal for Sunita. She may choose to invest ₹75,000 in high-rated corporate bonds or government securities, which offer stable returns with minimal risk. The remaining ₹50,000 she can place in fixed deposits or debt mutual funds to provide liquidity while ensuring capital protection.

Unlike equities, bonds provide a steady stream of income through interest payouts. This makes them a reliable choice for people who are about to retire soon. This approach will provide Sunita with financial security while preserving and steadily growing her savings.

Life Insurance and Investment Strategies

While you work on your investment strategy, do not forget to add life insurance to it. Such a policy can significantly help your loved ones in case of your untimely demise. Let us take a look at a few reasons why you must consider a life insurance plan:

Financial Security: A life insurance policy is a crucial plan that helps secure your family’s financial future when you are not around. In the unfortunate event of your passing, it provides your family with a lump sum payout. This amount can then be used by them to cover their essential needs like managing everyday expenses, clearing pending loans, and covering major financial goals like your child’s education or a home loan.

Peace of Mind: Would you not prefer your family to live a secure and stable life in your absence? Everyone wants their loved ones to not worry too much emotionally when they’re gone let alone added financial pressure. This is where life insurance provides you with peace of mind by assuring you that your family will be financially protected, even in your absence. This way, you can focus on your other financial goals without worrying about your dependents.

Tax Benefits: Another benefit of life insurance is that such policies provide tax benefits under Section 80C and Section 10(D) of the Income Tax Act. This means that you can save on your taxes while also securing your family’s future. The premiums paid can be deducted from your taxable income, and the payout received is usually tax-free, making it a smart addition to your financial plan.

Diversification: Adding life insurance to your investment strategy will help create a balanced portfolio. While investments like stocks and mutual funds carry higher risks, life insurance offers stability and assured benefits. Some plans, such as savings and ULIP policies, provide both life cover and wealth accumulation. If your goal is to achieve long-term financial security, these plans are perfect for you.

Wrapping Up

Investment strategy is a critical component of successful wealth management and financial planning. It is a comprehensive plan that outlines an individual's approach to investing their financial resources to achieve specific goals and objectives.

Developing a well-thought-out investment strategy is essential for several reasons. Firstly, it helps investors align their investments with their risk tolerance, time horizon, and financial goals, ensuring that their portfolio is tailored to their unique needs and circumstances. Secondly, a robust investment strategy can provide a framework for making informed decisions, reducing the emotional biases that can often lead to suboptimal investment choices. Finally, a well-designed investment strategy can help investors navigate the complexities of the financial markets, diversify their portfolios, and potentially enhance their long-term returns. By taking the time to carefully consider their investment objectives, risk profile, and time horizon, investors can position themselves for financial success and work towards achieving their long-term financial goals.

Glossary:

Risk-Return Placement: Balancing potential risks against expected returns in an investment strategy.
Preservation Strategy: An investment approach focusing on maintaining the original investment's value.
Benchmark Portfolio: A standard against which the performance of a portfolio can be measured.
Nifty 50: A stock market index representing the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.
Portfolio Rebalancing: The process of realigning the weightings of a portfolio's assets to maintain a desired risk level.

FAQs Related to Investment Strategy

Taking these steps will provide you with a practical strategy to help you reach your long-term objectives.

⦁ Understand why you are making the investments.
⦁ Determine the level of risk you can tolerate.
⦁ Have an investment strategy.
⦁ Maintain a diverse investment portfolio.

Key factors you should consider when developing an investment strategy involves

Investment Goal: Identify your objective, be it short-term bill financing or long-term retirement savings.
Time Horizon: How much longer can you invest your money?
Tolerance for Risk: Thirdly, determine whether you are willing and able to assume investment risk.

It may be necessary for investors with a long time horizon and a high risk tolerance to adopt an aggressive strategy. This strategy consists mostly of a large share allocation with a small amount of cash and bonds. Accepting a higher level of risk and volatility in order to enhance capital growth is the aim.

A diverse portfolio lowers risk without significantly lowering returns, which is why financial advisors frequently recommend it. Holding a varied portfolio can ultimately increase your long-term investment return.

Variations occur with life in terms of risk tolerance, time horizon, market conditions, and diversification requirements. Consequently, in order to keep your investing strategy in line with your financial objectives, it must also be adjusted.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.