Chasing returns vs. wealth creation: Which is a suitable approach in the long run?
If you want to achieve financial well-being, then investing across assets is the way to go. You can customise your investing style based on your financial goals, risk profile, income, and age. However, there are two fundamental ways approaches to investing: chasing returns and wealth creation. You can invest in different types of investment avenues including mutual funds with both these investment strategies. But it is up to you to choose one over the other or create a balanced approach for financial well-being.
Let’s explore both investment strategies one by one and then examine the wealth creation and chasing returns difference to find out which one is more suitable for you.
- Table of contents
Chasing returns
If you focus on optimizing the returns from your investment in the short term, you are following the investment strategy of chasing returns. Here are a few characteristics of this investment strategy:
- Chasing performance: Investors who chase returns tend to move their money into investments that have recently performed well. Such investors believe, often erroneously, that past performance will continue in the future and earn them better returns. This short-sightedness may make them buy high and sell low.
- Lack of diversification: If investors concentrate on investing in a few well-performing assets or sectors, they ignore the diversification principle of investment. Lack of diversification can expose their investment portfolio to significant risk. While investing in mutual funds offers diversification, investors may have to invest in different types of schemes to create a balanced portfolio.
- Impulsive investment decisions: Emotional reactions to market volatility are prevalent among investors who chase returns. Impulsive buying and selling decisions ultimately hurt investment outcomes.
- Lack of planning: Investors who chase returns may not have a clear financial plan or well-defined goals. Even if they do, they fail to stick to their financial plan. The focus on making quick profits from short-term market movements may even prevent them from achieving their long-term goals.
Wealth creation
This investment strategy entails building a substantial and sustainable financial foundation over a long investment horizon. Here are some key principles associated with the wealth creation investment approach:
- Portfolio diversification: Wealth creation emphasizes diversifying your investment portfolio across different asset classes, such as mutual funds, stocks, bonds, and real estate among others. This helps spread risk and reduces the impact of market volatility on the portfolio.
- Long-term focus: Investors pursuing wealth creation typically have a long-term investment horizon. They know that building substantial wealth takes time. They avoid reacting to short-term market fluctuations and practice patience with their investments. The power of compounding works in their favor and helps create wealth.
- Goal-based investing: The wealth creation investment strategy involves setting specific financial goals, such as saving for retirement, funding a child's education, or buying a home – and mapping them with different types of investments. Astute investors create a well-structured investment plan and stick to it.
- Risk management: Investors using this strategy understand that all investments carry some level of risk and focus on managing risk rather than avoiding it entirely. They not only diversify their portfolio but also periodically rebalance it.
Chasing returns vs. wealth creation: Which should you choose?
Wealth creation and chasing returns represent two distinct approaches to investing. Here are the key differences between them:
- Aiming to achieve financial goals: Map your investment goals to different types of investments. You can choose the chasing returns strategy to achieve your short-term financial goals and focus on the wealth creation strategy to fulfill your long-term aspirations – but never the other way around. A mix of both investment strategies can work for most investors.
- Periodic reviews: If you chase returns you are likely to follow market trends and economic developments. This will help you make informed decisions rather than reactionary ones. The key is to remember that market volatility in the short-term averages out over the long term. You cannot tweak your long-term investment strategies all the time based on short-term market trends.
- Portfolio diversification: Portfolio diversification remains a cornerstone of successful investing. An adequately diversified portfolio across asset classes over varying investment horizons helps to manage risk. Holding a good mix of short-term and long-term assets helps you tap into the benefits offered by both investment strategies.
In conclusion, wealth creation and chasing returns represent two contrasting approaches to investing. While the appeal of quick profits can be tempting, it is better to adopt a long-term approach to wealth creation for more consistent and sustainable results. By striking a balance between the desire for returns and the wisdom of wealth creation, investors can potentially increase their chances of achieving financial well-being.
FAQs
What are the main risks of chasing returns in mutual funds?
Chasing returns can lead to relatively higher risk investments that might be unsuitable for your financial goals, potentially resulting in losses.
How can I strike a balance between returns and wealth creation in mutual funds?
Diversify your portfolio, choose funds aligned with your goals, and maintain a long-term perspective to balance risk and returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.