Investment Basics

As an earning individual, you have several needs – your own and your family’s. Most of us take our current income for granted and fail to estimate our future requirements accurately. While your income may be serving you adequately now, it may not always be so. After all, our needs increase with time, but unfortunately, the value of money does not. The chart below shows various investment options available today, and the actual returns they offer after accounting for inflation. Prepare a financial plan Before you start investing, it’s important to first determine your goals. Different goals will have different strategies. Consider whether you’re investing for the long term or the short term. See how much you can invest. It’s a good idea to review the plan regularly with a licensed financial adviser or broker. Diversify your portfolio Most financial planners will suggest a balanced portfolio of investments. This means that you evenly spread your money across shares, bonds, cash and property. You can mitigate risk by combining riskier assets, which offer the possibility of a higher return (such as shares), with lower risk and lower return assets (such as cash or bonds). If your risk appetite is low, consider plans that offer capital security. Remember that some assets will perform better than others – don’t expect everything to go up. Some elements may fall while others prosper. Don’t worry. Keep your focus on the total return over the long term.

It’s not about timing the market, but the time in the market Most newcomers to investment (especially in equities) tend to worry about the right time to start investing. There’s no such thing as the right time. Invest whenever you have the money. The sooner you start investing, the longer the investment period you can afford. To get the best returns, the minimum period you should look at should be 5 years. Over the long term, cash is unlikely to deliver returns to outpace inflation Many newcomers feel that cash is a safe option to invest in. This, however, gives lower returns in the long-term. It is therefore not recommended that you put invest all your money in cash alone. Instead, estimate how much you think you’ll need (your personal liquidity requirements) and invest only that amount in liquid investments, spreading out the rest in other asset classes. Invest systematically over a long term If your aim is to accumulate wealth in the long run, then you need to disregard short-term fluctuations. Investing small amounts over the long term helps you avoid timing the market. (Also see: What is the benefit of a SIP?) Ensure your investment partner has a proven record.

The returns you get on your investments depend on the decision-maker. If you’re investing in mutual funds, then your returns will be decided the Fund Manager and the firm to which you entrust your investment capital. Make sure you invest with a firm that has a proven record for delivering high returns. Before investing, ask for performance records. There isn’t a common solution When investing for the first time, some investors copy what others are doing. Keep in mind that your investment goals are your own. Talk to your financial planner and set your own investment goals. Then pick the right strategy to fulfill them. How much you should invest depends on how comfortable you are with risk. High risk options like the stock market may have higher payoffs in a shorter term while lower risk options like Fixed Deposit schemes give profits over the long term while providing more security for your capital. To maximize your returns, you need to spread your investment capital evenly across different options (low risk & high risk). How much you should invest will depend on your investment goals and the time periods involved. For example, if you are planning for your children’s higher education, you’ll need to consider (i) how much you’ll need and (ii) after how many years will you require this amount. You’ll also need to account for inflation. Then, compare the returns of different instruments and choose the one best suited to your requirements Some investment strategies like a Systematic Investment Plan (SIP), diversified portfolios and new instruments like capital guarantee are designed to beat the market risks.

If you are new to equities, and still trying to understand how things work, start with a risk-free equity-linked plan like the Kotak Safe Invest Plan II. Also see: What percentage of your earnings should you mark aside for investments? Goal-Based Financial Planning New investors often start investing without planning. Planning your investments is imperative to the kind of returns you can expect and when to expect them. Remember: everyone’s needs are unique, i.e. different goals will have different strategies. Do not try to copy what your neighbour/colleague/friend does. Here are a few simple steps you can follow to plan your investments. Write down your financial goals (child’s wedding, retirement, child’s higher education, etc.). Calculate the amount you feel you will need for each of them (remember to account for inflation). Put down timelines for each of your goals, i.e. how many yeas later will you require that amount. See how much of your earnings you can safely invest each year (remember to keep some savings aside, and account for any foreseeable growth in earnings – which means you may be able to invest more next year). Study the returns of different investment instruments (remember to account for inflation). Choose the instruments that best suit your needs and allocate different amounts for investment in each of them. It’s a good idea to review the plan regularly with a licensed financial adviser or broker. Also see: Investment Tips Retirement Planning Planning for retirement is not as simple as it sounds. You need to consider your current expenses, guess at your future expenses and account for inflation. You also need to set aside an amount for emergencies. To get a rough estimate of how much you need after you retire, just follow the steps below. Calculate the number of years left to retire (use the relevant multiple in the table below) Calculate your current monthly household expense Multiply these two numbers with the magic number 123 and this is the amount you need to save for your retirement.