5 Important Investment Lessons to Learn Amidst the Monsoon Season!

The monsoon has finally arrived in India, and the bounteous rains are being welcomed with open hearts. The monsoon season has long been regarded as the month of new beginnings. It also brings a sigh of relief from the scorching heat of summer, offering respite and rejuvenation to the earth. Most importantly, rainy days are of utmost importance for farmers to make their crops flourish. As compared to the other parts of the world, Indians, with warmer summers and agrarian society, very eagerly look forward to the monsoon season every year and worship it.

Monsoon is a great season with a cold breeze, drizzles of water everywhere, and a great atmosphere. The gloomy weather and heavy rain showers have excited many of us to sip hot tea/coffee, onion fritters, and roasted corn while listening to the voice of rain falling on our rooftops. Who would have thought that in the middle of all of this, the monsoon could also impart some crucial investment lessons!

Most investors aspire to create wealth to fulfil their life goals and achieve financial freedom. While, the ultimate goal is to create wealth, many investors are still baffled by how to go about it. Spending less and saving more is the straightforward solution, but this is easier said than done. Furthermore, savings alone cannot do the job. Deploying your savings astutely into worthy investment avenues is crucial to let them work for you. For consistent wealth building, there are several more factors that one must understand.

Monsoon brings a unique perspective on investing, and here are some of the investment lessons that one could learn and implement during their journey of wealth creation:

1. Watch for the potholes on the road (Risk Management)

Before the monsoon season, the government prepares for rain. It rebuilds the roads, covers the potholes, and makes provisions to avoid rainwater clogging the regular route. Similarly, you also need to plan to avoid the risk effects of investing in the financial world. While investing in any type of investment avenue involves a certain risk. Although many would argue that risk is merely volatility, there is little distinction. Volatility is not risk; it is the manifestation of risk. Hence, a risk to investors in the context of the financial markets refers to the likelihood that they may sustain losses as a result of variables affecting the overall performance of the markets in which they are engaged.

The first step in managing investment risk is understanding your risk tolerance. Your desire to take risks and your capacity to do so together define your risk tolerance. Your psychological makeup preferences and financial situation all have an impact on how risk-tolerant you are. To avoid any unforeseen losses, make sure your investment portfolio is in accordance with your risk tolerance.

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2. Don't leave without an umbrella (Portfolio Diversification)

Just as an umbrella protects you from the rain showers, similarly investing wisely with the right asset mix can protect your portfolio and reduce the risk of high market volatility. You need to create an Umbrella of diversification; diversify your investments across the market cap and asset class under one umbrella that is your all-weather portfolio.

A well-diversified portfolio containing a broad mix of asset classes like equity, debt, and gold will likely be less volatile over the long term than a portfolio concentrated in only equity or debt investments. In an all-weather portfolio, losses in one asset class tend to be offset by gains in other areas. So, if you want to mitigate the level of volatility in your portfolio, diversification is the key.

[Read: Indian Equities Near a Lifetime High! Why Investing in Multi-Asset Funds Now Makes Sense]

Although investors may get swayed away by the recent market highs and emphasis on equities, it's also important to choose an asset allocation that makes sense for your financial situation and aligns with your goals. Broadly a 12:20:80 asset allocation rule may be followed. With this strategy, investors could allocate at least 12 months' worth of expenses in liquid funds for times of emergencies, 20% of their entire portfolio in gold to give downside protection during times of uncertainty and invest 80% of the portfolio in diversified equity funds. A SEBI-registered investment advisor can help you diversify your investment and choose assets that reflect your suitability.

3. Take care of your health (Rainy Day Fund)

While the rainy season offers a respite from the long summer, it also presents a number of health risks, including elevated humidity, stagnant water, and a rise in waterborne diseases like cholera, typhoid, sore throat, cold coryza, and fever. During such times, we take preventive measures to avoid any health issues. Similarly, you need to maintain a Rainy Day Fund as a safety net to protect your financial health.

You see, an emergency can occur at any time, leading to the need for quick funds. The sudden loss of a job, medical emergency, financial crisis, every emergency can be managed without much stress if there are adequate savings to cover the current requirement. Thus, there is a need to build an emergency fund that is equal to 6-12 months of expenditure, including your obligations.

In addition, to secure the financial future of your loved ones and protect them from any financial challenges, you may also purchase an adequate insurance cover to indemnify the risk to life and health.

4. Drive slow but steady in rains (Market Volatility)

This is a crucial lesson to learn because, just as you would be extra aware while driving on a rainy day, you should exercise caution while making investments in volatile markets. You must remain put and maintain patience with your portfolio despite the erratic market and uncertain events. Avoid making any panic redemptions; more importantly, staying invested in the long run is how you may generate a high return on investment. However, on the contrary, you should consider reviewing your portfolio periodically to eliminate the existing holdings that are consistently underperforming and derailing your portfolio returns.

You can invest via Systematic Investment Plan (SIP) in mutual funds to build a corpus steadily over time and generate inflation-beating returns. Various free online tools, like the SIP Calculator, can assist you in determining the approx investment amount required for each of your financial goals.

5. Follow the predictions but trust your instincts (Informed Investment Decisions)

Sometimes the prediction may say that the rains are unlikely, a thunderstorm or light showers. But sometimes, the predictions are less than accurate. Similarly, while investing, you always need to keep an eye on the market trends, but you also need to do your own due diligence and make informed investment decisions.

Often, investors fall prey to behavioural biases like herd mentality and make investment decisions influenced by market noise. Not everyone would have the same portfolio and financial goals as you. So, you need to make decisions for yourself based on your risk profile, investment horizon and financial goals.

Therefore, as mentioned earlier, only spending less and saving more will not help in the journey of wealth creation; you also need to comprehend the above-mentioned investment lessons.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.