Set Investment Goals After Assessment
Investment Goals
All investments are made with certain purpose or goals. Investment goals are aligned with financial milestones like marriage, education of children, retirement of self etc. Investment instruments are tools that generate good returns over a period of time. In the case of many investments, especially in the case of investments linked to stock markets, short term fluctuations are very common and hence such instruments are best suited for long term horizon. Hence proper assessment is essential to make judicious investment goals and decisions.
Assess yourself before setting investment goals
Assessment of suitable investment option begins with assessment of self. Certain questions to be asked in connection with investment goals are:
1. What is my risk profile? Can I withstand loss of capital of investment?
2. Whether I require periodical returns by way of dividends/ interests or capital appreciation/growth or both?
3. What is my time horizon? Is the investment horizon short (below 5 years) or long (preferably above 5 years)?
4. Will I have any short term financial requirement?
5. Is age on my side?
6. Will I be able to spend time for market study?
7. How much investment can I make? Whether it is lumpsum or in monthly/ quarterly/ annual basis?
8. Do I get any tax benefit?
All the above questions are relevant, but not exhaustive. The questions vary from person to person, but an investor should answer at least the above eight questions before finalizing any investment goal.
Risk profile varies from person to person based on his character, financial standing, support from friends and relatives, age etc. A person who is in young age can take more risky decisions compared to those persons who are at the fag end of his career. Similarly, when a person is financially sound and has alternate sources of income or support from friends or relatives can opt for higher risk. The risk of any investment is a loss arising from the investment. After proper assessment of various parameters, a person can decide the maximum risk he can take in terms of money.
The purpose of investment is a crucial factor in any investment. A person who has to solely depend on income from investment for monthly sustenance shall invest in term deposits offered by banks or in FMPs. But a person who has pension too can channelize a portion of his investment to high dividend yielding companies also. If a person is interested in growth, he should invest in good quality stocks. Over a period of time, equity offers the best return, but for short periods, investment in equity can even result in capital loss. For, the risk averse persons, debt funds or fixed deposits of banks are best suited.
For those who are having a short term investment horizon, the best suited investments are debt instruments and bank deposits. For, investments in stocks, either direct or through mutual fund option, a minimum period of five years is essential. During shorter periods, volatility associated with stock markets is on higher side while over long horizon, it ensures good return.
For meeting short term financial needs, an investor should have created an exigency fund. If, the investor is required to withdraw investments for meeting such short term requirements, his investment corpus will be eaten away by various charges associated with investment, withdrawal and taxes associated with such investments.
Age decides the risk bearing potential of an investor and also time horizon of investment. For a person, who is on the verge of retirement and who has a daughter to be married off, long term investments like equity or mutual funds are not recommended. For him, short term corporate debts, government securities or bank deposits are best suited as such instruments are less volatile.
A person who cannot devote time for market research and study should stay away from direct investments in equity market as direct investments in stocks require lot of research. If such a person is interested in stock market, the best option is mutual funds. Further, those persons who find it difficult to manage investments because of paucity of time, the best option is opting for qualified financial planners.
The investment options also vary depending on nature of investments like lumpsum or recurring. For recurring investments, SIPs and recurring deposits are suited. Lumpsum investments can be made at any time and suitable instrument shall be identified based on risk profile, time horizon etc.
Many instruments like ELSS, Provident Fund, PPS, NPS, NSC, insurance policies etc offer income tax benefits. Investors, who are tax payees should try to combine investment with tax benefits as part of proper financial planning. Similarly, housing loans offers tax benefits on repayment of principal and interest.
As can be seen from above, investment goals and decisions shall be finalized after proper assessment of both, self and investment instrument, to leverage maximum benefit from the investment.
