Case Study: Mr. Ramesh is a 30 year old financially well informed professional working with a MNC. He failed to capitalize during the bull run of market due to lack of surplus. He received a diwali bonus of INR 1 lakh in November 2006. So he invested the same amount in the equity funds to maximize his returns. He bought an infrastructure fund, India advantage fund; large cap fund and a multi cap fund each worth INR 25,000. By March 2007 his portfolio value was INR 92,736. This made Mr. Ramesh panic. He approached ArthaYantra for advice.
Solution: Most of us react impulsively towards changes in markets. Markets are meant to be volatile. Maintaining the strategy of staying invested for long time is always important. In order to stay invested for long time, it is important that we decide our portfolios based on our goals and diversify our investments rather than investing in single asset class. The two common characteristics of retail investors which contradict each other are: Chasing high returns by investing in equity markets and lose aversion which will push them to liquidate their investments at the first sight of drop in their portfolio value. It is important that we curb our behavioral instincts to make most of the investments being made. Diversification and Behavioral finance driven asset allocation can help investors stay invested during the turbulent times as well.
Result : Considering the Macroeconomic events of March 2007 and behavioral bias of Mr. Ramesh, ArthaYantra recommended him a portfolio with 55% in equities, 10% in commodities and 35% in debt. In addition to recommending a portfolio Mr. Ramesh was advised to have a long term perspective on the investment being made in order to enjoy the maximum benefits out of it. So even during the October 2008 period the recommended portfolio was worth INR 131,782. The recommended portfolio made sure that the capital is always protected and matched the risk tolerance of Mr. Ramesh.
