Prioritise strategy over returns for long-term investment success

Remember, returns are a consequence of a well-executed strategy, not the other way around. Shifting the focus from short-term gains to long-term strategic planning is crucial for building a robust investment portfolio. By adopting this strategic mindset, investors can position themselves to weather market fluctuations and achieve their financial aspirations

“Yojanaa Samajh Ke Nivesh Karo, Laabh Dekh Ke Kabhi Nahin

Yojanaa Labh Ki Janani Hai, Laabh Se Yojanaa Janmati Nahin.”

Translation: ‘Always base your investment on the fund strategy, never on the returns

Returns don’t define the strategy; the strategy determines what one earns.’

This Nivesh Sutra is like suggesting someone not to ‘put the cart before the horse.’ It is evidently foolish to give such an advice. It may appear to be obvious, but most people commit this mistake when it comes to investment. Let’s introspect, whether we have made our first investment by seeing the past return of the scheme or by understanding the strategy. Most of us would have committed this mistake of ‘putting the cart before the horse.’

When it comes to investing, most individuals make the mistake of focusing solely on returns. They do not take the effort to understand the underlying strategy of the fund. They chase funds with high past performance, hoping to replicate those gains despite reading the standard disclaimer time and again that “Past performance does not guarantee future results.” However, this approach can be misleading and even harmful. Instead, investors should base their decisions on the fund's strategy, not its returns, because that defines the funds return potential.

A fund's strategy refers to its investment approach, philosophy, and methodology. It outlines the types of assets the fund can invest in, the risk tolerance, and the expected outcomes. The strategy is the foundation upon which the fund is built, and it determines the potential risk-return profile of the scheme. Besides focusing on strategy, an investor is also advised to understand his risk- appetite and investment horizon and the goal that the investor is planning to invest for. The investor can also look at the performance of similar investment strategies to understand the return profile and the inherent volatility.

Returns, on the other hand, are the result of the strategy's implementation. They can be influenced by various market and economic factors, making them unpredictable and potentially volatile. Focusing solely on returns can lead to:

1. Chasing past performance: Investors may invest in a fund that has performed well in the past, assuming it will continue to do so. However, past performance is not a guarantee of future success.

2. Ignoring risk: High returns often come with high risks. Investors may overlook the risks associated with a fund, focusing solely on the potential gains.

3. Lack of diversification: Investors may concentrate their investments in a single fund or asset class, hoping to maximize returns. This can lead to a lack of diversification, increasing overall portfolio risk.

4. Emotional decision-making: Returns can evoke emotions such as greed or fear, leading to impulsive decisions. Investors may buy or sell funds based on short-term market fluctuations, rather than their long-term strategy.

In contrast, focusing on a fund's strategy provides a more stable foundation for investment decisions. By understanding the strategy, investors can:

1. Align with their goals: Investors can select funds that align with their investment objectives, risk tolerance, and time horizon.

2. Assess risk: Investors can evaluate the risks associated with a fund's strategy and determine if they are comfortable taking that amount of risk.

3. Diversify their portfolio: Investors can create a diversified portfolio by selecting funds with different strategies, reducing overall risk.

4. Make informed decisions: Investors can make informed decisions based on their understanding of the fund's strategy, rather than emotional reactions to returns.

In conclusion, returns are a byproduct of a fund's strategy, not the defining characteristic. By focusing on the strategy, investors can create a more stable, long-term approach to investing, rather than chasing short-term gains. Remember, a fund's strategy determines what you earn, not the other way around.

Believe, the above deliberations would help the prospective investors put the horse before the cart and not the other way round.

(The writer is Executive Vice President, SBI Funds Management Ltd)

(Translation and Synopsis by Nikita Derasaria, Chief Manager Product Development, SBI Funds Management Limited)