High Growth Portfolio

Want to know the secret to have the highest return portfolio? Read on!

Customization is key.......people before products. Don’t fall into the recommendation trap!

Today, lists of top performing mutual funds are available at the click of a button. Have you ever wondered why is it then, that very few investors are able to create wealth?

The problem lies at the very beginning of an investor’s journey. After all, 9 out of 10 investors begin by asking “which fund” they should invest into, instead of setting up clear goals and focusing on setting up a great investing process for themselves. It’s a common misconception that the secret to creating wealth lies in selecting the right stock or fund. As a result, people waste most of their time trying to find tips on where to invest, only to have their investing journeys derailed very quickly once markets turn volatile.

In reality, the secret to successful investing is very boring. It means following a streamlined process that ensures that your investments are customized to your specific investing requirements and goals. There’s no “one size fits all” when it comes to investing - an investment which might be great for one person can be a disaster for the next one.

Unfortunately, most investment advice in the country leads up to the ‘recommendation trap’, where financial advisors make the product their primary focus, instead of customizing the plan to the person who is actually making the investment. This is the reason why investors end up chasing return rather than having a goal centric, unique portfolio led scientific investment process.

Once you have identified your investment purpose, duration, amount needed and done the necessary calculations to meet your financial goals, the next step is to identify the right asset class to invest in on the basis of duration, transparency, liquidity and cost. Only after you have done all this, should you decide on the "product"! 

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Compounding - The Secret to a High Growth Portfolio

Make sure you are avoiding these three "compounding destroyers"!

It was none other than the great mind Albert Einstein who once said that “compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it”. Consider this: an investor who runs a Mutual Fund SIP of Rs. 25,000 per month for 15 years will likely end up accumulating close to 1.25 Crores of capital (assuming a modest long-term CAGR of 12%). On the other hand, an investor who pays a home loan EMI of around the same amount will, over the same period (assuming an 8.75% rate of interest) end up incurring nearly 28 lakhs of interest expenses, while paying off approximately 14 Lakhs of principal! In the first instance, it is you who reaps the benefits of compounding; in the second, it is the bank – at your expense.

Ironically, just a handful of investors will actually benefit from the magic of compounding, despite understanding its obvious payoffs. If you would like to end up on the winning side, avoid these all too prevalent three “compounding killer” habits.

Doing something with your portfolio all the time!

Most investors tend to grow impatient during times when markets do not provide satisfactory returns. Resultantly, they attempt to chop and change things around – booking losses here, taking some profits there… replacing a couple of ‘non- performers’, and so on and so forth. In doing so, investors often end up bearing transaction and taxation costs that set their returns back a few notches frequently. Additionally, there’s no guaranteeing that the changes will actually result in any improvement in future returns; too often, investors exit good investments that have been through a cyclical low, near the bottom of their cycles. Excessive churn is bound to take away from the compounding effect.

Avoiding measured risk taking...

Too many investors whose life stages and investment time horizons allow them to make high risk, high return investments, opt for the security of guaranteed returns of capital security instead. American Investor and Author Robert G Allen summed up the effect of too much risk aversion when he said - "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." Locking away your long-term moneys into Life Insurance plans that yield 4-6% or Fixed Deposits that fetch you 5%, will never allow you to benefit from compounding. Consider your retirement savings, for which you may have a time horizon of 25 to 30 years. Saving Rs. 20,000 per month in a Life Insurance plan that yields 6% per annum for 30 years will lead to a capital accumulation of 2 Crores. If the same amount was diverted to a more aggressive portfolio that earned 12% per annum on average, your fund value would have been a whopping 7 Crores.

"Short Term Wants" over "Long Term Needs".... the Hyperbolic Discounting syndrome

“Hyperbolic Discounting”, the No. 1 enemy of your long term financial goals, is the natural human tendency to attach exponentially higher significance to short term payoffs, as compared to more important, long term payoffs. That explains why someone would dip into their child education fund to buy a new car, or liquidate their retirement corpus to pay for their daughter’s wedding. It also explains why many investors delay their savings continually. The next time you’re about to fall for this pernicious little trap, take a pause and consider that doing so would almost fully negate any compounding benefits that could have accrued on this corpus. An example will help illustrate this – say, you’ve accumulated Rs. 16 Lakhs over 5 years, as part of a 30-year retirement savings plan, but decide to pull out this money to buy a new car. This seemingly innocuous act would set your retirement fund back by an incredible 2.72 Crores! Long-term compounding works in mysterious ways, and it’s important that you understand it.

Attain Financial Freedom

Highest returns do not come from investing in the last 12 months top performing stocks or mutual funds!

Most people invest with the mistaken belief that predicting the best stock or mutual fund is what leads to long term wealth creation… And so, they end up chasing returns, trying to fund the best fund to invest, and jumping from one fund to another every few months. In the long run, this constant search for ‘alpha’ doesn’t create wealth… but rather destroys it!

Investing based on short term past returns erodes wealth

The trouble with always searching for top fund to invest is that is that you will end up chasing that extra 1-2% return and keep switching to funds that have done well in the past 6-12 months, without realizing that what goes up comes down and vice versa! This roller coaster of past returns ends up eroding a lot of investor wealth.

Chasing returns reduces ‘investing resilience’

The number one contributor to wealth creation from equities isn’t fund finding the top fund to invest, but ‘resilience’ - or the ability to continue investing small sums of money for the long term so that you can benefit from compounding in the long run. Constantly trying to predict the best performing fund will make you impatient and returns centric, and will reduce your investing resilience.

Focus on the process

To succeed with your investments, stop chasing that 1-2% additional return and focus on having a great investing process instead. That is, define your goals clearly, understand risk and reward, invest with the correct expectations, and maintain investing discipline and then arrive at the best mutual fund to invest in for your goals. If you do this, you can spare yourself the headache of trying to predict the top performing fund, and still achieve all your goals comfortably!


Investment Behaviour Management is the secret to a High Growth Portfolio!

Fund selection is not the most important investing decision you need to take to meet your investment goals. Your 'resilience' or ability to remain invested is. How to build this resilience so that compounding can benefit you? Get an expert to understand your unique requirements - cash flows, investing beliefs, set the right expectations, identify your goals, select the right funds, choose the best investing solution, do periodic reviews. Wealth creation requires persistence and processes. Make sure you have the best investing experts and technology on your side!