Investment means to hold assets (Physical/Financial) over a longer period for appreciation or for receiving income from those assets or for regular income and appreciation both.Where as savings are made for short term goals.
All investments involve some risk. While someone invests with a hope of instant or short term gain, with or without proper analysis either they speculate or gamble.
A real investor always takes informed decision and you may consider the following important areas:
Draw Your Own Financial Map
While you make your Financial Planning you can easily understand your past and present financial situations. Now you honestly think about your future, where you want to go. But the problem is that your future may or may not resemble the past.
It’s obvious that before you invest, think about your risk tolerance, you may do it by your own or you may appoint a professional Guide to Financial Planning. It’s not guaranteed that you can make money from investments. While you understand about your savings and investments, you get financial security by managing your money prudently.
Consider your Risk Tolerance
Risk tolerance varies from investor to investor. There will be variability in investment return an individual is willing to take. If an investor takes too much risk may sell at a wrong time due to panic. An investor must be realistic.
If you invest in stocks, bonds or Mutual Fund Investment, you must consider entire or some of your money you may lose. It’s unlike Bank Fixed Deposits and P.P.F etc. While you take risk, as a reward you may earn good return. If you know your financial goals and time horizon, you can invest carefully even by taking risk in stocks, bonds or mutual funds. You may not restrict yourself to less or no risk instruments, where you can’t avoid inflation risk, income tax, therefore, your principal will be eroded over time.
“Don’t put all your eggs in one basket”-Harry Markowitz. Diversification reduces risk if returns are not perfectly correlated with each other. But over diversification is also a problem. If you see history of equity, debt and gold all have not moved up or down at the same time. Market condition is the cause while one asset class do well the other may perform average or poor. Therefore by investing in more than one asset category you can reduce the risk of losing money and your portfolio will generate a smooth return. If one asset category generates negative return the other asset category may offset.
In addition, proper assert allocation is important. In case you are investing for long term, say, retirement or your child’s higher education, your financial planner will agree that you have to add at least some stock or equity related mutual funds in your portfolio. Otherwise it’ll be difficult to offset inflation.
Re-Balancing Your Portfolio
You re-balance your portfolio at a predetermined interval, may be every after 6 months or 1 year. Re-balancing will control risk. Your portfolio will perform according to market. As time goes on, your portfolio’s current value will drift away from your original target valuation as per your risk tolerance. If left without adjustment, your portfolio may be either too risky or too conservative. It’s like wheel alignment checking and balancing act of your car.
Consider Rupee Cost Averaging
As equity is related to market, how do you decide what is the good price to buy? SIP is a strategy that you can use. By making regular investments the same amount each time, you can buy more when its price is low and you can buy less when price is high. In a volatile market it works better. Instead of lump sum investment it would be wise for you ‘rupee cost averaging’ strategy. Don’t try to time the market but give time, i.e. keep a long-term perspective
Pay Off High Interest Debt
If there is no such investment where you earn more than what you pay as interest on your debt, then try to pay off the balance as early as possible. Interest of credit card loans is the best examples.
Avoid Sales Pitch
You may be victim of sales pitch if you don’t put your logic. Sales pitches like- guaranteed high return, income tax benefit, payment term is limited, limited time period offer, great investment opportunity etc. but there are catches which you may not notice.
Create And Maintain A Contingency Fund
Keep six months income in your bank savings account to meet your emergency expenses. If you are temporarily unemployed due to sickness, change of job etc. Although you may have other investments, but if you liquidate prematurely, it might be costly for you and not only that you have to go through certain time taking procedures.
Instead of Online Mutual Fund Investment, if you keep your money in your locker, it’ll not work for you when you need and you will outlive your savings. By investing your money, you generate more money. For very short term goals you can save but for long term you have to invest to generate inflation adjusted return. As they say, “Money isn’t everything, but happiness alone can’t keep out the rain.”
This article is written by me and is my own original creation. If there is any claim to the contrary, I am solely responsible and I indemnify The Financial Planner’s Guild, India (FPGI) and any other publication that carries my article.