Diversifying investment style is crucial: FundsIndia’s Arun Kumar
Mint, Kumar, known as the 80:20 investor, discusses his investment portfolio, his reasons for avoiding real estate, and why diversifying investment styles is as important as asset allocation. He advocates for a focused approach to investing, leveraging the ‘Pareto principle’ (80:20 concept) to achieve optimal results with minimal effort. Edited excerpts: The name is derived from the principle of 80:20 investing, also known as Pareto law (or Pareto principle).
It states that 80% of results in most areas of life come from 20% of efforts. For example, in your wardrobe, you likely use only 20% of your clothes regularly. Similarly, in investing, successful investors often focus on a few key stocks that drive the majority of their returns.
The idea behind 80:20 Investor is to apply this principle to investing, focusing on the critical few investments that yield the most significant results. There are several key factors. Firstly, understanding and leveraging the power of compounding is crucial.
For instance, if you invest ₹30,000 monthly at a 12% compound annual growth rate (CAGR), with a 10% annual step-up, it takes seven years to reach ₹50 lakh, but only another three years for the next ₹50 lakh, and so on. Compounding accelerates wealth accumulation over time. Secondly, choosing an asset class based on your risk appetite is vital, as no asset class guarantees returns.
Maintaining a long-term investment horizon, around 10-15 years, and consistently investing is essential. Lastly, waiting patiently for the magic of compounding to unfold is critical. There is a famous example given by ace investor Ramesh Damani on how to go from ₹10 lakh to ₹1 crore.
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