Most of us start investing based on tips from friends, colleagues and family. What one would be looking at is making good return; period. An insurance policy would be bought for some sort of safety and mainly for the tax benefit. As we go up the ladder in terms of age, wisdom and income, we would add more investments along the way, now with some research thrown in – a child plan, some equity investments – perhaps IPOs, some SIPs, a house definitely and some FDs and bonds for sure. All of which is good as diversification is the name of the game, but what is missing is a direction, a purpose, a goal. If you were to approach each and every investment from the perspective of a goal that it will help achieve, then your investment program will be far more effective, successful and in your control.
When you are contemplating any investment, ask yourself what is it that I want to do with this investment. What is the goal I will be able to accomplish when this investment matures? When you start looking at investments from the perspective of needs and goals, automatically questions of where to invest, how much to invest and for how long to invest get answered.
Start this with the investments you have already made. Sit down with your significant other and look at your future to list out your life goals – short term (within the next 3 years), medium term (3 years – 7 years) and long term (7 years and above).
Now, you can allocate each investment to a particular goal, matching time horizon, degree of risk and cost of funds.
For all short terms goals you can either put aside money in liquid mutual funds if the goal is just on the horizon or invest in debt products like FMPs which match the duration of your goal, as there isn’t any time for investments to grow very much without risk. If you have a goal of buying household electrical items, like a fancy fridge or a big screen LCD by next Diwali; say the amount required is Rs.60,000, then an SIP of Rs.5000 every month for the next 12 months is a good way to put aside money for this goal.
The 3 years to 7 years window of medium term goals allows you take exposure to risk and you can invest in large cap and comparatively stable stocks and mutual funds along with some debt products.
For long term goals, equity is the answer along with mandatory investments like EPF, Superannuation and Gratuity. Unit linked plans – child plan, endowment plan or pension plans are also a good instrument to save for long term goals that are at least 15 years away. If you don’t have much faith in ULIPs, start an SIP for your child’s education and continue it without withdrawing from it.
Linking investments to goals allows you to evaluate your financial position clearly. It will throw up the gaps if any between what you can achieve given your current investments, cash flow and future income. Therefore this entire exercise gives you better perspective and focus not only on investments but your life in general!