Vasudha can draw a broad distinction between a long-term approach (essentially ‘buy and hold’) and a short-term approach that is more about making tactical investment decisions to take advantage of investment or trading opportunities in the markets. As a long-term investor, she may try to identify companies which offer the prospect of good returns over the years. By contrast, as a short-term investor, she might seek out immediate opportunities offered. For instance, during the ongoing covid crisis, she can use the fall in aviation stocks to invest, hoping for a rebound over the next few months.
It is important for her to be able to articulate her investment goals, as these will largely direct her strategy. Is she looking for growth, income or a combination of both? Investors seeking income traditionally have turned to fixed income such as bonds, PPF and balanced funds or to high dividend-yielding equity shares. Investors looking for growth, on the other hand, are likely to invest more of their portfolio in companies that tend to use their profits to grow their business, rather than paying those profits out in dividends. Conventionally speaking, the balance between growth investments and income investments, which are generally thought of as ‘defensive’, is likely to change as she grows older and her financial circumstances change. She may use the core and satellite strategy to build her portfolio.
In this approach, the ‘core’ or the foundation of her portfolio typically contains a number of investments that give her broad exposure to a range of asset classes, such as large-cap equity, bond fund, bank deposits, PPF and gold. The ‘satellite’ component comprises investments she might make to try and generate extra returns to take advantage of short-term opportunities.
Vasudha’s investment strategy can be thought of as the blueprint that sits behind her investing decisions. Her investment objective should consider factors such as the level of income or capital growth and the purpose. While developing her strategy, it is also important to consider her financial circumstances and take into account other factors like time horizon, investment goals, portfolio construction preferences, etc.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
