We all need to save for our retirement, an emergency, child’s education, child’s marriage, buying a house, etc.
Thus, we have to invest our money wisely, so that it grows and helps us meet our objectives. This is only possible with proper Investment Planning.
Investment Planning helps you to:
- Choose the Right Investment Options according to your requirements and goals.
- Strike a Balance between Risk and Returns to arrive at a mix that suits your needs.
The selection of an Investment Option involves a balance of 3 things, primarily:
- Liquidity: How quickly an investment can be converted to cash to cover financial emergencies.
- Safety: The relative safety of the money invested against market risks and inflation.
- Returns: Investments are made for generating returns. Safe investments offer limited returns but risky investments offer good to excellent returns. The selection of the right investment option depends upon your own financial goal and, above all, your risk taking appetite.
FIX YOUR INVESTMENT STRATEGY
You need to design a road-map for reaching your destination. So, start by first assessing your risk appetite and your risk profile. By nature, most investors are:
Conservative - Invest in secure, fixed-income investments like bank fixed deposits, etc.
Moderate - Invest in mutual funds, bonds, select equity shares etc.
Aggressive - Invest in above average risk like equity shares, derivatives, etc.
PLAN YOUR INVESTMENTS PRUDENTLY
A wise investor plans in advance to get the maximum benefit from his investments. Some elementary methods are given below :
1: Identifying your financial needs and goals
This simple illustration will help you to plan your investments.
Target |
Current Cost |
Required Time |
Investment Term |
Son’s Education |
5 Lacs |
18-20 years |
Long-term |
Daughter’s Education |
5 Lacs |
18-20 years |
Long-term |
Buying a House |
30 lacs |
15-18 years |
Long-term |
Buying a Car |
6 Lacs |
2-3 years |
Medium-term |
Son’s Marriage |
10 Lacs |
24-25 years |
Long-term |
Daughter’s Marriage |
10 Lacs |
24-25 years |
Long-term |
Retirement |
50 Lacs |
30-35 years |
Long-term |
Total |
116 Lacs |
|
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2: Knowing the available investment avenues
- Equity or Stocks (Risk Level - HIGH) : These are ownership of shares in companies that are traded on the stock markets. Investment in stocks does not assure any fixed Rate of Return and, hence, are considered risky. Yet, the maximum returns are also generated by them.
- Hybrid Funds (Risk Level – MEDIUM to HIGH) : These involve a mix of Debt instruments as well as Equity in a proportionate manner so as to partially protect capital, yet provide higher returns than fixed instruments/bonds. These can be a mix of higher or lower equity proportions, to suit individual requirements.
- Debt instruments / Bonds (Risk Level – LOW to MEDIUM) : These instruments not only assure a fixed return but also return of your principal at the end of the investment term. Examples are PPF, NSC, Company Fixed Deposits, GOI Savings Bonds, Corporate NCD’s, etc.
- Cash Funds (Risk Level – LOW) : Examples are investments in bank savings accounts, liquid mutual funds, floating rate funds, etc.
3: Decide an appropriate mix of investments with the help of an Investment Advisor
The “Asset Allocation Plan” is about allocating your investments according to your risk taking capacity and financial needs. This can only be achieved with a proper allocation of investible funds in the appropriate avenues available at your disposal i.e. Equity shares, Hybrid Funds, Debt instruments and Cash Funds.
FACTORS THAT INFLUENCE YOUR INVESTMENTS
1: Inflation
Inflation is the rate by which the level of prices for goods and services rises. Thus, you can purchase lesser quantity of goods for the same amount of money. The obvious way to tackle this menace is to invest some of the available funds at a rate higher than the inflation rate to overcome the loss.
The following table shows how the value of Rs. 1,00,000 will change over time at different levels of inflation.
Inflation % p.a. |
Years |
2% |
3% |
4% |
4.5% |
5% |
6% |
5 |
90,573 |
86,261 |
82,193 |
80,245 |
78,353 |
74,726 |
10 |
82,035 |
74,409 |
67,556 |
64,393 |
61,391 |
55,839 |
15 |
74,301 |
64,186 |
55,526 |
51,672 |
48,102 |
41,727 |
20 |
67,297 |
55,368 |
45,639 |
41,464 |
37,689 |
31,180 |
25 |
60,953 |
47,761 |
37,512 |
33,273 |
29,530 |
23,300 |
30 |
55,207 |
41,199 |
30,832 |
26,700 |
23,138 |
17,411 |
See how the value of Rs. 1 lakh today drops to Rs 55,839 in 10 years (inflation @ 6% p.a.)
2: The Power of Compounding
The power of compounding is the method by which small investments over a period of time become larger.
The following illustration shows how much your money would grow when you invest a fixed amount every month over a period of 10, 15, 20, 25, and 30 years, assuming an interest rate of 10% p.a.
Power of Compounding
Amount (Rs) |
Years |
1000 |
2000 |
3000 |
4000 |
5000 |
5 |
78,082 |
156,165 |
234,247 |
312,330 |
390,412 |
10 |
206,552 |
413,104 |
619,656 |
826,208 |
1,032,760 |
15 |
417,924 |
835,849 |
1,253,773 |
1,671,697 |
2,089,621 |
20 |
765,697 |
1,531,394 |
2,297,091 |
3,062,788 |
3,828,485 |
25 |
1,337,890 |
2,675,781 |
4,013,671 |
5,351,561 |
6,689,452 |
30 |
2,279,325 |
4,558,651 |
6,837,976 |
9,117,301 |
11,396,627 |
The result of the Power of Compounding can only be perceived over a period of time. The golden rule is to start the habit of saving early in life if you want to achieve your set targets.
Interestingly, in the following illustration it shows that your investment would not grow as much if you make a lump sum investment at the same rate of interest i.e. 10%.
Amount (Rs) |
Years |
100000 |
200000 |
300000 |
400000 |
500000 |
5 |
161,051 |
322,102 |
483,153 |
644,204 |
805,255 |
10 |
259,374 |
518,748 |
778,123 |
1,037,497 |
1,296,871 |
15 |
417,725 |
835,450 |
1,253,174 |
1,670,899 |
2,088,624 |
20 |
672,750 |
1,345,500 |
2,018,250 |
2,691,000 |
3,363,750 |
25 |
1,083,471 |
2,166,941 |
3,250,412 |
4,333,882 |
5,417,353 |
30 |
1,744,940 |
3,489,880 |
5,234,821 |
6,979,761 |
8,724,701 |
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