Benjamin Franklin rightly says, “An investment in knowledge pays the best interest”. Investment is a smart decision by an individual to get the best returns. However, the process of investment, in its true sense is not an easy one. First-time investors are more likely to face the heat when deciding when and where to invest their hard earned money for consistent and favorable returns.
Since beginners do not have the proper knowledge of market gyrations; it becomes far more challenging for them to understand the returns – key indicator of their investment performance. For a layman, surplus earned over and above the principal is often termed as returns.
When you invest, you are interested to know whether youre making progress toward your financial goals. After all, we all anticipate and desire higher growth and to have a more orderly money life. For this, an investor needs to be a great follower of the market and understand the nitty-gritty of equity ball game.
The questions – What do I invest in? And am I happy with my investments? are very emotional and subjective. This primarily depends on how well the investment decision has been made and its credibility. Very few of the investors really understand their investments. In many occasions, people invest impetuously merely getting into prevailing market sentiment. When they do so, they fail to analyze how the invested stocks would benefit them in the short or longer terms.
Directing all your investments in a single industry or group of stocks is not a very good idea now, when the market situation is gloomy and uncertain. Now, what would be advisable is to diversify as diversification ensures that the investor portfolio grows positively even if one or the other things go down.
However, wealth creation is not an overnight affair; you, as an investor should spend extra time towards researching and identifying stocks or mutual funds that would correlate with your financial goals. It is imperative that you understand the underlying purpose of the returns on your investments.
In a layman’s understanding, returns are often termed in value and percentage change. But then, there are three methods of calculating performance of an investment and their returns:
Absolute returns: The most common method to interpret the investment performance, Absolute returns is very easy to calculate as it measures the value of investment at one point of time with other. It is generally used to measure the performance of mutual funds with high equity exposure, whose NAV (Net Asset Value) fluctuates from time to time.
Simple annualized returns: This is an extension to absolute returns. It is an average annual return on investments over the period of time. The simple annualized return is used for those funds, whose NAV is less volatile or fluctuates less frequently.
Compounded annualized growth rate (CAGR): The CAGR rate is used to calculate returns for the period beyond one year for all types of mutual funds. The CAGR returns are annualized returns, which consider compounding effect.
To get consistent and promising returns on your investment you have got to be a tax-smart investor. What would be called as your actual investment return is what you keep after taxes. Holding tax-efficient investments in taxable accounts and less tax-efficient investments in tax-advantaged accounts may add value to your portfolio.
Expenses and taxes have significant impact on investment returns over time. As an investor, asset allocation and investment selection are some of the most important decisions you face, but keeping costs and taxes low isn’t less challenging either. When you invest, to reduce portfolio volatility is an important aspect.
Consistent returns, minimum risks and liquidity are the three essentials what any investor looks for. To realize the actual after-tax wealth, first fix your mind on a suitable asset allocation, select low-cost investments and at last become tax-smart about where you hold your investments.
Disclaimer:
1. Views, as are mentioned in the article, are personal views of Author and nothing to link with Co., its Director and Employees.
2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment
