What comes next, is building a robust investment portfolio that supports your financial objectives. Deciding to start investing towards your goals is the first of many steps you need to take for an investment journey.
Before you start building your dream portfolio, there are a few important things that you should consider.
The first step in assembling your portfolio is to pay careful attention.
Before you invest, find out your goals. Your goals could be anything such as marriage, education, planning a family, children’s education or buying a car/house to save taxes and create space for savings.
Once you have a clear understanding of the necessary steps to achieving your goals, set a time horizon for that plan.
For example, you have two years before beginning your higher education and this goal becomes a short term priority. If you have children and are planning for their early and higher education within the next 10 years, this becomes a medium to long term goal.
Retirement is an important and well-planned long term goal for everyone, but saving tax will be a more immediate goal.
When you know what you want to achieve, you can set specific goals. For instance, if your goal is Rs 1.5 lakh for tax-saving purposes, Rs 50 lakh for college tuition fees abroad or Rs 1 crore for retirement savings
We can determine the number of funds you need by considering your specific goals. For example, we should combine long-term and short-term savings and decide how much to invest accordingly.
An overview of risk appetites.
Then next factor you have to consider is your risk tolerance. Risk appetites determine how much one can invest and how much they are willing to lose if the markets are volatile.
Do you want to earn the maximum interest rate but also minimize risk? Do you have both strength and financial stability that can help with potentially losing money from time to time, but earning top priority and coming back stronger until your investments become stable again?
There are three broad categories of how risk is managed: risk takers, individuals who avoid risks entirely and those in the middle.
The most difficult aspect of this area is determining where you fit on the spectrum of risk, which depends on several variables such as liquidity requirements and the number of dependents under your care.
A higher risk category includes those who are young, have enough savings to weather a financial crisis, and little financial responsibilities. The long term goal for this group could be accelerated wealth creation.
Typically, investing in stocks and equity funds can be a beneficial option since it provides reasonable returns compared to traditional forms of investment.
Unfortunately, there is no way to avoid market risk, which means that just at the beginning, you might see your portfolio balance fall below zero. But if you want a high return on investment for most of your tenure as an investor or in this case saver, then it’s a tradeoff well worth taking.
Savings accounts are generally safe investments with moderate returns, but do not usually provide high returns. Fixed deposits and recurring deposit accounts (RDAs) are common savings account types, and debt instruments such as government treasury bonds also tend to have low risks with medium-level interest rates.
Selling government debt instruments and investing in mutual funds is considered safer than investing directly in equities because they carry a guaranteed rate of return and are government-backed.
In fact, having a banking product supervised by the Reserve Bank of India while being backed by longstanding financial institutions also provides traditional investors with an extra sense of security.
This exercise may seem hectic, but your own profile and risk will ensure you have expectations right from the investment products you invest in. Assessing your own risk if important to help avoid the mis-appropriation of funds.
Using an example of a person who has a low income and low risk tolerance lets us understand this better.
The salary of the person: Rs 30,000
Investable assets: Rs 5,000
Balance: Rs 25,000
Risk appetite: Low
Assuming the person invested their money in an equity index fund, it is benchmarked to Sensex values.
In April, the Sensex lost more than 25% of its value. If you sold then, you would lose at least Rs 1,250 on your investment.
.To illustrate, what has been the outcome of low-risk investing?
If you had an emergency, using Rs 3,750 from your corpus would leave you with only Rs 3750 after the investment.
The situation and you required at least Rs 5,500 to invest in your deposit account by the end of the sixth month.
There are two problems worth highlighting with this investment.
Diversification in the market means spreading your investments across different industries and sectors so that you may takadvantage of all stock market cycles.
You invested all your money in the Sensex during this time period, but it has declined. You missed out on any benefits of another investent that happened simultaneously.
For example, the price of gold has increased by at least 10 percent in dollar terms.
Considering your investments in equities, gold, and other investment options would have enabled you to take the best features of the products.
This is not a claim that you should invest in gold over equities. Instead, it's simply an example of how diversification can come in handy- you could redeem the money invested into a product that has done well for an emergency situation while others remain working to produce returns.
Investing in multiple assets spreads the risk rather than having all your eggs in one basket. If that basket faced pressure, it could break all the eggs.
You had little risk appetite because of your lower income level and invested all that you could afford in high-risk products. Equities are volatile products with no guarantee to provide short-term returns.
You have incurred a loss of Rs 25,000 on your investment. You will need to find ways to fund your other upcoming expenses and it is unclear if you can recover this sum from the remaining balance.
There are a few things you can do to reduce the risk though. For example, consider dividing your money across different products which can or cannot include equities, depending on your tolerance for risk.
You have your goals in mind, and you know how much risk you are willing to stomach, but the next important step is to align your risk with those goals. As an example, let’s say that a child needs 15 years worth of funding for higher education:
If you invest in an investment with high risk and reward, such as equities, your monthly contributions may be less because of the expected high returns.
If you are a conservative investor who does not want to bear the brunt of volatility in the short term and want assured returns, then you can look at options like PPF or fixed deposits.
Your investments may not grow as much if you invest only in the liquid funds, since they are popular for the short time horizon. But it is fine to take a balanced approach towards both types of funds and gain from each type of fund simultaneously.
Capital allocation should also be aligned with your profile.
At the end of the day,
You will be more successful as an investor if you are self-aware. To have a basic understanding of the market and its ways, do research before investing your money.
It’s important to educate yourself about different products available and your country's economy, since these factors will impact how much money you can save.
People are made differently and so is their investment strategies. Therefore, make sure to understand yourself as an investor before designing a strategy that suits you best.
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