You save for a month to buy that latest mobile phone or you utilize your bonus to take a trip with your friends or family. And you pretty much feel satisfied about the fact that your goals and finances are kind of balanced. Now, these are your short term goals which you competently take care of very well. How about the long term goals? For instance taking care of your family’s dreams or funding your child’s education or funding your retirement. And what about the time if an uncertainty strikes.
Are your financial planning that strong to take care all your short and long term goals? Well the answer to this question would most certainly be ‘Not quite’. That’s because although we give priority to savings, we don’t quite explore the territory known as ‘Investment’. And even if we do, we start investing without acquiring enough knowledge about it. Now you don’t want to be in either of the boats. You cannot rush when investing and you cannot be laid back about the whole thing. Hence strike a balance. This post will help you achieve the same!
Think why you investing
What’s your goal? Are you doing it for a short term goal or a long term?
You cannot be aimless about it at all. We come across to so many people who declare that they want to invest but don’t have a goal! That’s like deciding to travel but don’t know where. So pick your goal first. Retirement is a goal by default and is the topmost in the priority list.
Think when you need the money
The time remaining is the single most important factor that determines whether a particular instrument is suitable or not. So it helps to be precise about the duration.
Think how much you need
This means you need to know the target corpus. If you are planning for your child’s education, you can estimate what it costs today. Then with a reasonable inflation percentage calculate the target corpus during the year you need the money. You most definitely get a tentative budget. It’s no rocket science!
Think of an appropriate benchmark
By this we mean for goals that are at least 10 years away,inflation is the benchmark. An investment or couple of investments should be able to beat inflation for such long-term goals (take cue of child’s education again). The amount we invest is also important to achieve the target corpus.
Think of the asset class
Now this is another vital step. You need to know the asset class you need to achieve the target corpus, given the time you have. Once the benchmarks are clear, the asset classes should be clear too. Like: Gold is a dud investment that offers risk more than stocks, but rewards like a fixed deposit. Whereas real estate requires a lot of knowledge and a lot more starting capital.
Think of the expected return
This would need a bit of knowledge gathering as to how asset classes operate.
For example in fixed income returns depending on the overall health of the economy, it’s hard to
predict over the long-term. Post-tax 6-7% is a reasonable expectation for the next 5-10 years.
Also it is reasonable to expect equity produces returns that are close to or even a bit lower than how the GDP has grown over 5,10,15 years (depending on the duration that we have in mind).
Calculate how much of each asset class should you choose
Now you have decided which asset classes to choose and how much return you would be expecting from them. The next step is to decide how to build a portfolio with this information.
Suppose we expect 10% (post-tax) from equity and 6% (post-tax) from fixed income, we can mix them up in different ways depending on the need.
For a 10+ year goal: 60%-70% can be in equity.
For a 5-10Y goal: Anywhere between 0%-40% equity depending on comfort level.
For a 0-5Y goal: 0%-20% equity.
Please note: This is a complete tentative calculation which may differ from person to person depending on the goals each one set. This is just to give you a fair idea.
Now decide investment categories
Since by now you will be done choosing the asset classes and their proportions would be decided, you can consider the categories available in each asset class.
This would completely depend on your comfort level, understanding of the product and associated taxation. Whether you choose equity mutual funds or stocks or debt mutual funds, it’s your choice. You can also take help from financial experts to help you with this.