7 key principles a thoughtful investor follows when investing


As we have seen with previous black swan events such as the 2000 tech bubble collapse, the 2008 GFC (Global Financial Crisis), or the current Covid-induced financial crisis, the future is unpredictable. However, how one responds to uncertainty can be planned well in advance. Unfortunately, we see many investors getting swept away with emotions of fear and greed and responding to market noise without proper heed to the relevance of their investments to their financial goals.

To survive the market ups and downs and stay on the path to achieving your goals, it’s necessary to have the right mindset and follow certain principles to be a thoughtful investor.

Let’s explore the key principles a thoughtful investor follows when investing.

1. Saves for a rainy day: To start with, before one starts chasing returns in market-linked or fixed income products, thoughtful investors keep a financial backup or “Emergency Money” ready to see them through 12 months of expenses during times of emergencies. Instead of redeeming from their existing investments and upsetting their financial journey, they park this money in a safe place like a Liquid Fund scheme or a bank savings account to see them through unforeseen circumstances. They don’t go chasing returns on a Liquid Fund, for they are aware that for a Fund to qualify as an Emergency Fund, it needs to work on the “SLR” principle – prioritizing safety and liquidity over returns. It needs to give them the flexibility to redeem anytime, just like they would with a bank account. For a Liquid fund to prioritize safety and liquidity, it needs to have a robust portfolio with minimal interest rate risk. One of the ways a thoughtful investor assesses the portfolio is to check the factsheet or the newly SEBI- mandated Potential Risk Class (PRC) matrix to evaluate the underlying portfolio and the riskiness of the fund.

2. Looks beyond returns for sustainable growth: A thoughtful investor understands that a lack of foresight on risk and responsibility management eventually translates into lower profitability and valuation. As such, they move beyond chasing bottom-lines and understand the importance of non-financial parameters such as environment, social and governance (ESG) that have a material impact on the future of earnings potential. They invest responsibly using ESG mutual funds. They are aware of companies resorting to greenwashing to gain mileage from the globally emerging ESG investing trend. Among the plethora of ESG funds and ETFs, they look for a fund that walks the talk when it comes to integrity and goes beyond desk-research to offer a 360-degree comprehensive approach to filtering companies. The primary focus they look for is whether the fund portfolio provides exposure to businesses that achieve the triple bottom line – the 3Ps of Planet, People and Profits.

3. Builds wealth over the long-term with patience and discipline:

Many new investors start their investment journey looking for instant returns. They lack patience or are swayed by what friends and family say. A huge number of such investors burnout in the initial couple of years with losses during market downturns. As per AMFI statistics, 55% of retail investors have a holding period of 2 years or less. While fluctuations may make a short-term investor jittery and lead him to make some poor decisions, thoughtful investors build wealth with a long-term view and are most likely to gain from the power of compounding and achieve their goals. When valuations appear expensive, they reduce downside risk by going for a true-to-label value fund that incorporates a margin of safety approach to investing, follows a bottom-up stock selection process and shortlists stocks tuned to grow with market recovery.

4. Overcomes emotions to make a rational decision:

A thoughtful investor knows better than to let market movements and macro-uncertainties take control of their emotions. Investors swept with fear and greed end up investing in funds after listening to the so-called “advice” of their friends and peers, thereby putting their wealth creation journey out of gear. It is critical to make decisions rationally and not let these emotional biases get in the way of one’s mutual fund investments.

For instance, an investor overcome with greed might chase the top-performing schemes in terms of recent returns which, in turn, may or may not ultimately work in their favour. While rankings and returns could be one aspect of assessing mutual funds, there’s more to the story behind a mutual fund such as the fund philosophy, the quality of the fund management team, etc.

A thoughtful investor instead looks for a diversified Equity Fund of Funds that simplifies their equity mutual fund selection needs and helps them overcome the hassle of tracking and managing multiple funds. An Equity Fund of Funds offers them a well- researched diversified portfolio of third-party equity mutual funds chosen after careful quantitative and qualitative research.

5. Looks beyond traditional approaches of purchasing gold:

While gold’s potential for preserving value over the long term is known to all, thoughtful investors are also aware of its portfolio diversifying role that helps minimize downside risks during periods of macro-economic uncertainty. They prefer investing in newer options such as Gold ETFs or Gold mutual funds that do away with pricing markups and locker charges. These financial forms are more liquid and cost-effective. Gold ETFs can be liquidated anytime and do not have any lock-in period. Gold ETFs transfer the benefit of wholesale purchase prices at retail level. Additionally, gold mutual funds are GST-registered entities and can claim a GST set off, which is passed onto the scheme and will improve returns of the scheme to that extent.

6. Does away with timing the market with a prudent asset allocation strategy:

Asset Allocation strategy is the process of diversifying one’s portfolio using underlying investments of equity, debt, and gold. Instead of chasing that winning asset class or sector, a thoughtful investor keeps things simple by investing using the 12-20-80 asset allocation strategy. He/she does away with timing the market and sticks to a long-term plan based on a 12-20-80 asset allocation strategy. Here are the building blocks that form this strategy.

Foundation Block: Sets aside safe money worth 12 months of expenses in a liquid fund such as Quantum Liquid Fund

Risk Reducing Block:

Resorts to gold’s risk-reducing characteristics and allocate 20% of their portfolio to the yellow metal through efficient forms such as Quantum Gold Savings Fund and Quantum Gold Fund ETF.

Growth Block:

Diversifies the balance 80% across an equity bucket that is market cap, sector, or style agnostic comprising
Quantum Long Term Equity Value Fund,
Quantum Equity Fund of Funds and
Quantum India ESG Equity Fund.

Finally, a thoughtful investor also exercises flexibility to a point up to 5% of their portfolio that they would like to invest in opportunities that complement or add value to their overall investment portfolio. For the most part, a thoughtful investor sticks to the tried and tested 12-20-80 asset allocation strategy and does not let market noise or macro-uncertainties deter their financial journey.

7. Keeps it simple with a Multi Asset Fund of Funds:

A conventional approach to saving and growing one’s wealth might be a fixed deposit. However, more and more investors are realizing the importance of having an option for potentially generating higher returns. Thoughtful investors prefer to keep it simple with a
Multi Asset Fund of Funds which gives them the freedom to ride the market volatility with peace of mind. The fund managers follow a regular rebalancing approach within each asset class of equity, debt and gold, on the investor’s behalf, thereby giving them the potential to generate risk-adjusted returns over the long term.

To sum up, let’s see the principles that make a thoughtful investor

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So, a good way to start transforming your mindset and become a thoughtful investor is to use the opportunity to re-evaluate your asset allocation strategy from time to time.

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