Saving and Investment go hand in hand. An investor does Saving first then he invests that saving in different asset classes to generate income. Investment is a process where we make our savings work for us.
But have we ever gave importance to the thought process behind every investment we generally do? Or many times it is just a random investment for many of us.
Whenever the question of investment comes the thought process should be same irrespective of your desired investment amount. Even if you want to invest Rs 5000 or 50 lakhs your steps in investing process should be the same.
What should be our thought process when we think of investment?
Identify your life goals: This should be the first step in your thought process when you decide to invest certain amount. You should first identify your life goals. Investing without a goal means investing randomly which may not be sustainable and can be stooped any time if any emergencies happened. Goal-based investment helps to be focused and disciplined in investing until the goal is achieved.
List down your life goals: Second step will be to pen down each and every of your goals. Sometimes you may find you have high goals but your current financial status may not be sufficient to achieve those. Still pen it down. Its very important to know your wishes. They will keep you motivated to achieve those in the future.
Priorities your life goals: As I discussed in our life at certain stage of life we may not be in a position to achieve all the listed life goals in this situation you should prioritize your goals. Always give priority for retirement over any other goal then kids education and marriage , house purchase car purchase etc will come.
Access your risk appetite: Before venturing into any financial product first access your risk appetite. Check out whether any market fluctuation increases your heart beats or your B.P. goes up and down. If yes then you are a conservative investor or else you are aggressive one or you can be moderately aggressive.
Decide your asset allocation: Once you know which type of investor you are you need to decide your asset allocation for each and every goal. Asset allocation not only depend on risk profiling of the investor but also on the time horizon of that particular goal. Asset allocation is a process of deciding proper mix of different asset classes such as equity, debt, real estate, gold and cash equivalents etc.
Chose right financial instrument: Every asset class has different types of financial instruments. Wise investor chooses those financial instruments which he understands he/she knows the pros and cons of these instruments. For example in Equity you can have stocks as well as mutual funds. In mutual funds too large cap, multi cap, mid and small cap , hybrid funds etc. Same in debt category debt funds, FDs, RDs, PPF, EPF etc. So choose those financial products whose characteristic is known to you.
Map each of this mix of financial instruments to your life goals: This step is very important. Now as you have decided the right mix of financial instruments as per your asset allocation now to need to map each of that instrument to every goal. This process will help to tract the performance of investments pertaining to each life goal.
Review the overall portfolio performance periodically : This activity needs to be done once in a year. Review is very important to know the performance of your chosen financial assets. If needed you can change it in annual review process but frequent churning of the portfolio is not advisable. Don’t churn your portfolio based on share market fluctuations. It hampers the long term earning capacity of your portfolio.
Move your corpus from risky asset class to safer one once goal is near: This activity is also very important. As your goal is nearing you should start doing Systematic Transfer Plan(STP) from all equity mutual fund to debt mutual fund. This way you make sure your accumulated corpus is safe and free from market fluctuation. Ideally this process should start 2 years prior to your goal. But if you achieve the targeted corpus of the particular goal early this exercise should start immediately.
This is a point wise thought process each investor should follow while making investment. Investments done with proper focus and study can help you manage your finances well rather than random investment done without much study.