What Is Investment Strategy

What Is Investment Strategy?

An investor makes decisions using an investment plan based on their goals, risk tolerance, and anticipated future cash needs.

Written by : Nitin Bhatia

Reviewed by : Gaurav Nagpal

Gaurav Nagpal

2024-08-20

1268 Views

8 minutes read

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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

Factors to Consider for your Investment Strategy

Investing is one of the proven formulae to building wealth and achieving your goals. The number of options to invest money is vast, and how you diversify your investment depends on more than one factor. The proportion of allocation depends on the following:

  • Your financial goals
  • Life goals
  • Risk appetite
  • Income level/forecast
  • Personal circumstances

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. Indexing: In this strategy, you invest money in stocks that are part of the indices. For example, NIFTY50, NIFTY BANK.

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.

1.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.

2.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.

3. 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.

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.
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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.