Investment Strategy - Learn The Best Way to Invest Money

Making investments without considering any of your finances and risk appetite can be extremely risky for your capital. Hence, an investment strategy comes to the rescue. It is a strategic set of rules that considers all of your finances and investment objectives in order to help you make informed investment decisions. 

In this article, we will share all about the investment strategies with you, including the types of investment strategies and the factors that you should consider while curating one for yourself. 

What Is An Investment Strategy?

An investment strategy includes a set of rules that are designed to help an investor achieve their financial and investment goals. This strategy guides the investor to make investment decisions based on their current finances, risk tolerance, and future needs for capital. 

There are two types of investment strategies: One focuses on a very conservative move (that focuses on a low-risk strategy where the focus is on capital protection) and the other is highly aggressive (that focuses on rapid growth with capital appreciation). An investor can choose any of these strategies to create their investment portfolios, or take the help of a finance professional. 

Although investment strategies work on a solid basis, one needs to note that strategies aren't static. So, your investment strategies have to be re-evaluated on a regular basis as your personal preferences change over time. 

Importance Of Investment Strategies

Having an effective investment strategy can help you make quick decisions about purchasing an asset, and thus, reducing any risks of investing in the wrong assets. It also makes you more goal-oriented and informative about your investments to help you diversify your portfolio. Investment strategies can also be very helpful in choosing the right assets for you. 

Types Of Investment Strategies

Here are 5 common investment strategies used by investors:

1. Active Investment Strategy

An active investment strategy involves buying and selling positions to outperform the market. This strategy applies mostly to highly liquid markets such as stocks and shares. Using this strategy, investors can capitalise on quick-time period market tendencies. However, it requires a lot of time and effort to do so. 

The key of this highly rewarding strategy is to rightly predict the market moves. Some examples include intraday or short-term investing in stock markets. 

2. Passive Investment Strategy

A passive investment strategy has a “buy and hold” approach that keeps costs and efforts low. This strategy mimics market indices instead of trying to beat the market, unlike an active investment strategy. It can be used for all investment options such as equity, fixed-income, and even real estate. Some examples include investing in index funds, mutual funds, dividend-paying stocks, long-term stock market investments, corporate bonds, SDIs, and more. 

3. Value Investment Strategy

A value investment strategy seeks for underpriced but fundamentally strong investment assets. Then, investors hold these assets for the long run until they reach their ultimate high worth. It applies the best to investors looking to purchase underpriced real estate or corporate bonds of a company that might outperform. 

4. Growth Investment Strategy

Growth investors aim to invest in small companies that have revenue growth. This strategy involves paying higher prices for shares in these businesses, hoping that the prices will increase in the future. 

5. Income Investment Strategy

An income investment strategy focuses on generating regular dividends or interest income with a low-risk approach. It invests in preferred stocks, bonds, or SDIs. The strategy is suitable for investors wanting to increase their earnings as this strategy complements other strategies and thus, balances risk by creating a diversified portfolio. 

Factors To Consider When Choosing An Investment Strategy

There are a vast number of options that you can choose from to invest into. However, how much you diversify your investment matters the most. So, here are 5 factors that you should consider when choosing an investment strategy for yourself:

• Current Financial Situation:

Assess through your existing debt and emergency funds before selecting any investment strategy as they'll influence your selection. 

• Risk Tolerance:

Check your financial ability and willingness to take an investment risk. If your risk appetite is low, you may prefer secure, low-risk investment options. 

• Investment Objectives:

Define your investment goal — whether it is for your long-term retirement savings, or to fund your short-term expenses. 

• Liquidity Needs:

Analyze your liquidity requirements as per your investment objective. Options such as stocks, ultra-short liquid mutual funds, etc., are well-suited if you need your funds in 1-2 years. Keeping liquid assets such as a savings account and emergency funds can help you maintain liquidity. 

• Time Horizon:

Choose the time horizon for the number of years you want your capital to remain invested. Long-term investments are better suited for riskier investments like stocks. On the other hand, short-term investments are good for low-risk options such as fixed deposits. 

After considering these factors, you can start to build your investment strategy. 

Process Of Building An Investment Strategy

Developing an effective investment strategy involve the following four steps:

1. Set Financial Goals: The first step is to create clear financial goals by defining your investment objectives and preferences. It will help you gain clarity of your desired returns, risk tolerance, and investment timeframe. 
2. Evaluate Investment Preferences: The second step is to evaluate and define the options where you want to invest your capital into. This could range from equities, bonds, gold, to mutual funds or automated sip portfolios. 
3. Develop a Rule-Based Strategy: Formulate a structured set of rules to finally execute your strategy. Here, you can include entry/exit points based on the predefined economic, industry, and stock thresholds. 
4. Test and Monitor Strategy: To optimize your strategy's success parameters, it's important to monitor it and evaluate historical data. Take the help of a financial advisor and implement course correction to ensure that your strategy remains relevant over time. 

Tax Implications Of Investment Strategies

It is very important to consider the tax implications when curating an investment strategy for yourself. This can help reduce tax liabilities and boost your investment’s returns. There are two strategies for tax optimization: tax-efficient investing and tax-loss harvesting. 

Tax-efficient investing focuses on cutting out tax liabilities by selecting investments and accounts. Therefore, your investment preferences should include your tax bracket and financial liabilities. 

On the other hand, tax-loss harvesting aims to sell underperforming securities in a non-tax-advantaged account to release capital losses. These capital losses can help reduce the overall tax burden. Overall, this can help improve after-tax returns, if done as a part of your investment strategy. 

In India, stocks are subject to capital gains tax, with their rates varying as per the holding period. Short-term gains are taxed at higher rates than long-term gains and thus, long-term investments enjoy the preferential tax treatment. Stock dividends are also subject to dividend distribution tax (DDT) and thus, can affect an investor's overall returns. 

Equity mutual funds, including Equity-Linked Savings Schemes (ELSS), offer tax-saving benefits. Still, investors must be mindful of their tax-saving benefits. In India, the best practice is to navigate through the complex tax implications and optimise tax efficiency with the help of a financial advisor. 

FAQs

1. Which investment strategy is the best?

There is no ‘the best’ investment strategy for one to go with. Whatever investment strategy suits the best with your financial goals, you should go ahead with it. 

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

An investment strategy is a systematic way to make investment decisions based on predefined principles, guidelines, and rules. It is important to have an investment strategy for an investor to help them meet their financial goals while being sure of their investments. 

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

You can track your portfolio’s performance and compare it to relevant benchmarks to figure out if your investment strategy is working or not. If your profits are meeting the standards, the strategy is working and achieving your financial goals. 

4. Can an investment strategy change over time?

Yes, an effective investment strategy changes over time as the investor’s financial goals and objectives change. You should review and evaluate your plan periodically.