Investing IQ – Basics of Investment Planning

Investing basicsEveryone has personal dreams. Be it owning your dream car, lavish house, your children going to an Ivy League school, or taking that overseas holiday trip annually with family. But majority of people are unable to follow their dreams and give a specific shape to them. The reason for this is, they do not know what they should do to make their dreams a reality. As a result all those things which we consider dear to our heart are left open to chance.

What you have to do is pen down these personal dreams/goals as financial goals (i.e. personal goals that have a financial cost attached) and work towards a plan to achieve them.
For example, if you want to buy a car make it a goal by setting a definite time period to it (say in the next 3 years) along with the cost of car (say 10 Lakhs).

Now, how to achieve that goal? By following disciplined saving and proper investment planning.

For selecting the best investment options you need to take into account the following:

  1.  First of all you need to consider one of most important factors that many do not take into consideration – INFLATION
    Inflation can be defined as the overall general upward price movement of goods and services in the economy. It causes money to lose value. For example, a few years back you could get more fruits for 100 as compared to today.
    So, apart from stressing about theft (or demonetization), keeping your savings in the form of idle cash at home does nothing to mitigate the impact of inflation. In fact your cash loses its inherent value over time due to inflation.
    Putting your money in a regular savings bank account won’t help either because of the lower interest rates. Current rate of inflation is 5% and interest rate of bank savings account is 3-4%. Your money will actually decrease in value over time instead of increasing or in the best case its inherent value will remain the same. You have to find investments that earn more than 5% after tax to ensure it increases in value.
    Placing your money in investment vehicles like Stocks and Mutual Funds gives you a much better chance of outpacing inflation over a number of years. Yes it includes an element of risk but risk and reward go hand in hand. Higher the risk, higher the reward.
  2.  Another important fact that you need to understand is that there is no perfect investment option. What is good for one could be bad news for other. Ignoring this fact will land you in trouble. Investing in an instrument that worked for your friend may not always work for you. It could actually spoil your friendship. Never ever go for an investment blindly just because it was advised by your friends or family. Remember it is your personal finance here. Your personal circumstances (age, risk appetite, goals etc.) are not same as your friend’s. So how can the same kind of investment work for both?
  3.  Also, take into consideration time horizon of goal before selecting an investment option. For example, if you want to invest for funding your vacation next year don’t choose an investment vehicle that has a 3 years lock-in period. Similarly, if you want to invest for your child’s wedding after 10 years don’t invest in liquid funds for that.
    Divide all of your goals into category of:
    a.  Short term goals (within 3 years),
    b.  Medium term goals (3-7 years) and
    c.  Long term goals (more than 7 years).
    Approach your investment from a goal perspective. It will help you achieve your financial goals comfortably. It will also help you understand where to invest, how much to Invest and for how long to stay invested.
  4. Protect your goal
    What if something unforeseen happens and you either lose your life or your earning ability? What will happen to your family and goals then?
    What-ifs shouldn’t prevent fulfillment of your goals or hamper them in any way. Safety net for all such risk is Insurance. Never forget to have a good insurance plan in place for protecting your family and goals.

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