Investments and You

When was the last time you made investments based on a specific goal, with a time horizon, in line with your risk profile and using the asset allocation methodology.

Well let me take you through each of the above noted points, so that the next time you make an investment you know the method in the madness.

Goal

The final purpose or aim; the end to which a design tends, or which a person aims to reach or attain is a goal.

It is also the purpose toward which an endeavor is directed; an objective.

Well if you’re investing Rs. 1000 or Rs. 1 lakh or Rs. 1 million, have a goal. The goal could be any of the following:

• To buy a car worth Rs……..

• To buy a house Rs………….

• To go on a vacation which will cost Rs……….

• To donate for charity Rs…….

• To build a corpus of Rs………..

• To build a corpus for the education/ marriage of a child or also self., etc

Do remember the goal should be measurable in money terms

Time Horizon

Once the goal is set and decided, the next step will be to have a time horizon

The time horizon need to be set based on the requirement of the maturity of the investment ( if, one time) and in case of regular systematic investments, the corpus required and the rate of return required over the period of investment.

A goal without a time horizon is like a ship without a destination. Setting a time horizon in line with a goal is very important.

Risk Profile

Risk Profile is a tool which checks your risk taking ability and also the degree to which various risks are important to you.

One should ask a few questions to understand one’s risk profile

1. Is capital preservation more important than returns?

2. Are you willing to accept fluctuating movements when investing for the long term?

3. Do you want a regular income stream through dividends, or with growth through capital appreciation?

4. Will you accept above-average risk to generate above-average returns?

Asset Allocation

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

The three main asset classes - equities, debt / fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

A realistic goal statement – An illustration

I will invest Rs. 10,000 every month for the next 10 years, at an expected rate of return of 12% in a balanced Mutual Fund for a corpus of Rs. 22 lakhs.

Lets now understand does the above statement is in line with the Ist statement of this piece:

Goal                   : Corpus of Rs. 22 lakhs
Time Horizon     : 10 years
Risk Profile        : Moderate ( 12 % return )
Asset Allocation : Balanced Mutual Fund ( which invest 65% Equity; 35% - Debt)

Conclusion

Going forward wherein , one needs to make an investment , do have a goal; time horizon for investment , understand your risk profile and also follow the asset allocation methodology.

If this exercise is overwhelming, do engage a financial planner and wealth manager who will be part of your wealth creation journey.