Article Shared by Edelweiss AMC
The money that you earn can serve multiple purposes ranging from providing you security and cushioning the impact of emergencies to helping you achieve your financial goals. However, it is important to understand that money can serve its purpose only if you save and invest it wisely. Thus, it is important to make a good financial plan that accurately captures all your requirements and then invest your money as per this plan.
Here is a step-wise guide to creating an investment plan that can help you in achieving your financial goals.
Step 1: Determine all your financial goals. These could range from taking a foreign vacation and buying a car to buying a house and saving for retirement. The stated goals should be clear and as detailed as possible. For example, if you want to save for your child’s higher education, it would be good to note down the possible streams for which she might opt or the discipline she wants to pursue. This will help you estimate the amount of money required to achieve the particular goal. Once you make a list of all the goals that you want to accomplish, assign a time period to each goal. For example, if you want to buy a car, note down whether you want to buy it in 2 years or 3 years. This will ensure that you achieve your goals and influence the risk that you can take to achieve that particular goal. Mutual funds can be an ideal investment option to meet your multiple goals. Your short-term goals (less than 1 year) can be ably met by investing in liquid funds, your medium-term goals (1 to 5 years) goals can be achieved by investing in select debt funds while your long-term goals (greater than 5 years) can be met by investing in equity funds.
Step 2: Once your goals have been clearly articulated, the next step is to assess your risk profile. Your risk profile reflects your ability and willingness to take risks. Further, the investment time period also reflects how much risk you can take. For example, if your ability to take risk is low and your investment time period is 2 years, then you should primarily invest in low-risk instruments. In that regard, a Balanced Advantage Fund can be a great investment option. Such a fund invests in a mix of equity, debt, and gold investments and switches exposure from one investment to another depending on market conditions. When markets are going up, the fund buys more equity investments and when markets are going down, it sells equity investments and switches over to debt investments. This way, it is suitable for all investors.
Step 3: When it comes to creating an investment plan, you must ensure that it is diversified across multiple investment types. A well-diversified investment plan will ensure that your portfolio is not highly impacted by sharp negative movements in any one investment. This will protect your portfolio during volatile market conditions. For example, assume that 90% of your portfolio is in equity investments. Now, when the markets are going up your portfolio value is also going up. This makes you happy. However, when markets start going down, your portfolio value also falls. If at the time the markets start falling, one of your goals comes up, then you might not have enough money to meet that goal despite having invested in it. On the other hand, if you had a good mix of equity and debt investments then even in a falling market your portfolio would not have fallen as sharply since the debt investments would have limited the downside. This way, diversification can help you take the advantage of multiple investment types. Based on your return requirements, risk profile, and investment time period you should create an investment portfolio that is spread across multiple investment types like debt, equity, and gold. This approach to creating a diversified portfolio is called asset allocation.
Step 4: Review your investment portfolio periodically to ensure that it reflects your asset allocation plan and rebalance if there are sharp changes in asset allocation. For example, assume that as per your asset allocation plan, 60% is allocated to equities and 40% is allocated to the debt. Now, due to an increase in equity prices in a rising market, your allocation to equities increases to 75%. It might be better to exit some equity investments in such a scenario and bring your portfolio’s equity exposure back to 60%. Further, when you are getting close to your goal, it is better to remove the money accumulated and reinvest it in safe instruments. This will ensure that the earnings that you have generated are preserved.
Step 5: The most important step is to stay disciplined and seek advice when required. When creating an investment portfolio using mutual funds you have the option of investing in multiple categories, each with a different time period, risk, and return potential. However, you need to choose investments that can meet your financial goals while adhering to your risk and time boundaries. A financial advisor can guide you and help you create an investment plan that accurately captures your unique needs. An advisor plays a very important role in your financial planning journey. He can understand your needs, help you create a customized asset allocation strategy, advise you on the investments to be made, and guide you through the journey. This can take you many steps closer to achieving your financial goals.
If you follow these steps in a disciplined and focused manner you will be on track to achieving your financial goals.
Head, Product & Marketing
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