Investment Strategy: Meaning, Types, Considerations, Process (2024)

How do you make the most of your savings?

Understanding investment strategies is critical for wealth creation. An investment strategy is your plan for how you want to invest your savings

The article will break down the various types of investment strategies and processes. By the end, you will have a firm grasp on which is better suited to your personality. Let us start so you can make your money work as hard as possible!

What Is An Investment Strategy?

An investment strategy is your game plan for achieving financial goals. It guides investment choices based on risk tolerance, timeframe, and objectives.

A good strategy helps you stay focused through ups and downs and gives you discipline when emotions run high. Developing the right investment strategy involves understanding your current and future needs. With a plan in place, you have a system for making wise investment preferences. The remaining questions are just around the corner from finding the perfect fit.

Types Of Investment Strategies

Investment strategies allow investors to achieve their financial goals in a structured manner. Here are the five most common investment strategies:

1. Active Investment Strategy

An active investment strategy entails buying and selling positions to outperform the market and applies largely to highly liquid markets like stocks/ shares. Investors using this strategy try to capitalise on quick-time period market tendencies. It requires a lot of time and effort. The success of this high-reward strategy relies upon rightly predicting the market moves. Examples include intraday or short-term investing in stock markets.

2. Passive Investment Strategy

A passive investment strategy is a "buy and hold" approach that keeps costs and efforts low. The strategy mimics market indices instead of trying to beat the market. A passive strategy can be used for all investment products, including equity, fixed-income, or even real estate. Examples include investing in index funds, mutual funds, dividend-paying stocks, long-term stock market investments, corporate bonds, SDIs, etc.

3. Value Investment Strategy

Value investors look for underpriced assets. They research undervalued but fundamentally strong investment opportunities. Investors then hold these assets for the long run until they reach their true worth. While this strategy has been made most famous by equity investors like Warren Buffet, it applies to investors looking to purchase underpriced real estate or even corporate bonds of a company that is likely to outperform.

4. Growth Investment Strategy

Growth investors focus on investing in companies with accelerating earnings or revenue growth. They pay higher prices for shares in these businesses, hoping that prices will increase in the future.

Growth strategies work best in bull markets. It involves owning companies operating in dynamic industries. Both public and private equity (start-up investments) markets can offer such investment opportunities.

5. Income Investment Strategy

An incomeinvestment strategyaims to generate regular dividends or interest income from preferred stocks, bonds, or SDIs. This lower-risk approach suits investors seeking to supplement their earnings. This strategy complements other strategies to balance risk and build a more diversified portfolio.

Factors To Consider When Choosing An Investment Strategy

Selecting an appropriate investment strategy requires evaluating several essential factors.

• Investment Objective: Define your goal, whether it is long-term retirement savings or funding short-term expenses. Strategies targeting wealth accumulation differ from those focusing on income.
• Time Horizon: How long can your capital remain invested?When choosing an investment strategy, consider your time horizon. Generally, longer time horizons allow for riskier investments like stocks, which historically offer higher returns, while shorter time horizons call for safer options like fixed deposits and corporate bonds, which help prioritise capital preservation.
• Risk Tolerance: Thirdly, check your ability and willingness to take on investment risk. Low-risk investors may prefer secure,low-risk investment options, whereas high-risk investors will look at equities.
• Liquidity Needs: Analyse your liquidity requirements. Liquid options like stocks, ultra-short liquid mutual funds, etc., are better suited if you need funds within 1-2 years.You can maintain liquidity by having emergency funds or using liquid assets like savings accounts or stocks.
• Current Financial Situation: Assess your finances, such as existing debt and emergency reserves, influencing strategy selection. Paying off high-interest loans takes priority over aggressive investments.

Read more on how you canmanage your debt effectively.

• Research Existing Options: Lastly, explore available investment choices in retirement plans, brokerages, or direct securities. A thorough evaluation of these critical factors ensures matching investments to situational needs.

Process Of Building An Investment Strategy

Developing an effective investment strategy involves several key steps.

1. Setting Financial Goals:The first step is establishing clear financial goals by defining investment objectives and preferences. It may include wealth creation, income generation, or capital preservation. This clarifies the desired returns, risk tolerance, and time horizon.

2. Evaluate Investment Preferences:A vital consideration includes preferred asset classes and the level of involvement wanted. Options range from equities, bonds, and gold to funds, managed or automated portfolios. After defining objectives and preferences, you can identify appropriate investment products.

3. Develop Rules-Based Strategy:A structured set of rules is formulated to execute the selected strategy. This includes entry/exit points based on predefined economic, industry, and stock thresholds.

4. Backtest And Monitor Strategy:Evaluating historical backtesting helps optimise strategy parameters. Regular monitoring and course correction ensure it remains relevant over time.

Developing aninvestment strategy processwith the defined steps helps anchor financial decisions. Regular reviews ensure tweaks for changing market dynamics and manage the risks associated with volatility-prone stock markets.

Investment Options For Risk-Averse Investors

While stocks have been preferred as high-yielding investment avenues, risk-averse investors often search for better risk-reward-adjusted securities. Some high-yielding, new-age investment options are:

1. LeaseX:LeaseX is a listed, regulated, and rated securitised debt instrument (SDI). It provides investors with fixed, monthly payouts (and/or principal) made by one or more lessee(s). Lessee(s) are well-established companies looking for assets to grow their business.

2. LoanX:LoanX is a unique investment opportunity that lets investors invest in a diverse pool of loans to diversify risk. It is a SEBI-regulated, credit-rated, and exchange-listed fixed-income investment option. Grip Invest offers LoanX opportunities at favourable risk-adjusted rewards. Past LoanX offerings have ranged from A+ to BB, providing pre-tax returns from 12% to 15%.

3. InvoiceX:InvoiceX is a credit-rated and diversified high-yielding investment opportunity that allows investors to earn fixed income by investing in a pool of invoices from multiple companies. This differs from traditionalinvoice discounting, which involves investing in a single invoice.

Tax Implications Of Investment Strategies

When developing an investment strategy, it is crucial to consider the tax ramifications. This can help reduce tax liabilities and boost returns. Two key strategies for tax optimisation include tax-efficient investing and tax-loss harvesting.

Tax-efficient investing aims to cut tax liabilities by selecting investments and accounts. Investment preferences should incorporate an investor's tax bracket and financial liabilities.

Tax-loss harvesting involves selling underperforming securities in a non-tax-advantaged account to realise capital losses.These losses can be offset against your gains, reducing the overall tax burden.This strategy, done as part of the investment strategy, has the potential to improve after-tax returns.

In India, stocks are subject to capital gains tax, with rates varying based on the holding period. Short-term gains are taxed at higher rates than long-term gains, which enjoy preferential tax treatment. Additionally, stock dividends are subject to dividend distribution tax (DDT) at the company level, affecting investors' overall returns.

Equity mutual funds, including Equity-Linked Savings Schemes (ELSS), offer tax-saving opportunities, but investors must be mindful of the tax treatment of gains. Derivative trading in stocks is also subject to taxation, with speculative income tax applicable to trading profits.

Compliance with reporting obligations and seeking professional guidance is essential to navigating the complexities of tax implications and optimizing tax efficiency when investing in stocks in India.

Conclusion

A sound investment strategy is essential to achieve your investment objectives. The investment process involves thorough research and analysis of various factors. Regular monitoring and review of the strategy help minimise risks and maximise returns. A tailored investment strategy through a well-defined process can help you make informed decisions.

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Frequently Asked Questions On Investment Strategy

1. What is an investment strategy, and why is it important?

An investment strategy is a systematic approach that makes investment decisions based on principles, guidelines, and rules. It involves selecting an investment portfolio and helping to meet financial goals while considering an individual’s risk tolerance.

2. How do I create an investment strategy?

To create an investment strategy, you must determine your financial goals. Then, you can select a diversified portfolio of investments based on your preferences and objectives. You may also seek advice from a financial advisor to help develop a suitable strategy.

3. How do I know if my investment strategy is working?

You can track your portfolio's performance and compare it to relevant benchmarks. If your profits are greater than or at par with the standards, your strategy is achieving your goals.

4. Can an investment strategy change over time?

Yes, a well-designed investment strategy evolves together with the investor. You should review and adjust your plan according to your circ*mstances, financial objectives, risk tolerance, etc.

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