What return can I expect by investing in equity or debt? This is a question every investor is asking his fund manager these days. And along with the return, another word which is commonly encountered is ‘guarantee’. In fact, guaranteed return is becoming a buzzword in the investing world.
An investor needs to understand the cycle of returns across asset classes in the investing journey. Ideally, an investor should be asking what is the liquidity of the investment? Secondly, he should be asking what is the time horizon for the investment and what is the assurance of capital protection of the principal amount which he is investing?
And these questions should then lead to the asset allocation and the expected returns on the investment. But invariably, the first question one asks is: What is the return I can get?
Factors driving the returns
Return is an important factor while determining the investment. However, as a prospective investor, one needs to understand the factors driving the returns. And sooner the investor knows it, the better the investor can be in the long run.
As an investor, one would like to be in control all the time. What you can control is your behaviour and attitude towards the investment, provided you have a process in mind. What you cannot control is the volatility or the market movements.
Let us go a little further. You are a busy professional. You believe that experts of the field are the best and an advisor is the best to manage and guide you in the investment journey. At the same time, you also believe that you need to also handle the investment or a part of the investment corpus on your own. You feel that you need to have the knowledge and expertise to handle the investment part on your own.
And you then start investing in the markets on your own as you do not want to miss the opportunity. Also, you believe that, going forward, you do not want to outsource the investing management.
With the information flow becoming more secular, it is available in the same manner to most investors. Whereas earlier, if you knew a key management personnel of the invested company, you had more information and data, to make a decision on the investment.
Instead of asking for returns, investors must ensure the cash flow to meet any requirements. One needs to understand that it is the cash flow or the lack of cash flow, which can have an impact in one’s investing journey.
Cash flow in simple terms means to have the cash in hand when the need arises without disturbing the asset allocation. In the last 18 months, if you have been a new investor or even an existing equity investor, especially in mid and small-cap, then the returns are in the red. As an investor, you would have felt disappointed and would have wished that the investment could have been in fixed income instruments, which have delivered returns of around 8%, as against a negative return in equity-related investments.
That is why for an investor it is very important to ask the right questions and also be aware of the returns movement in the asset classes across the investing time period.