Are you Investing based on your Goals?

Are you Investing based on your Goals?

Saving and investing for a goal makes it more likely that you will achieve the goal. Time and risk are two important things that determine the nature of your investments. As a retail investor (by retail investor we mean an individual who invests for the purpose of wealth creation or fallback funds for unforeseen expenses) when you start putting money into the market ask yourself this important question. What is the purpose of your saving or investing?

It is an essential self-inquiry that you must do, simply because you are cutting back on expense now to save for the future or to enjoy a financially better-off future. A sacrifice that has to be 100% purposeful. It simply means that the benefits of the investment must outweigh the pleasure of spending today.

There are two important principles that you must stick to when it comes to saving and investing.

1. Re-balancing expenses in order to not lose sight of the present life and yet save and invest enough for a secure future.
2. Investing well to create wealth that will enable you allocate money for the different goals based on your priority.

Let’s take a macro view of the possible goals and investment options of an average 33 year – old committed individual.

Sukumar is an Operations Manager in a Multinational Oil and Gas Company. He enjoys a number of benefits from his company which covers his health insurance and that of his family. His pay package has a tax friendly structure allowing him maximum tax deductions under the different headings. However, he is concerned about rising education expenses and wants to save for his son’s overseas educational expenditure.

He must look at not just saving for this goal but also in investing it well enough and reap returns that will add up to a decent sum enabling him achieve the goal. Assuming that Sukumar has other goals like planning Retirement funds, Safety funds (to help him during unforeseen medical expenditure and during times of other emergencies), and creating assets for himself eg: buying a home. It will definitely be a difficult thing for Sukumar to cut out a portion of his income and save only for his son’s overseas education. However, if that is on his list of priorities and is willing to stick to a disciplined schedule, Sukumar can look at equity options which can help him achieve this specific goal.

With time in his favour, Sukumar can start early and invest in equity. SIP the Systematic Investment Plan would be great way to ensure safety, returns and liquidity for his investments. With an investment of INR 10,000/- per month, he can expect to have 8.5 lakhs at the end of 5 years and 16.5 lakhs at the end of 8 years at a 12% interest rate. This 12% is a conservative interest rate. SIPs deliver an average 16-17% per annum. Sukumar would have a handsome amount at the end of his investment period which will enable him make better decisions about his son’s overseas education.

Tracking Index returns

Time is a big factor when it comes investment. Equity investments get bigger and better with time. Staying invested or continuously honoring the commitment is the key to making desired returns. Alternatively, if Sukumar can also get the advice of a financial consultant or advisor, who can ascertain his goals and risk appetite, Sukumar can invest in the market. Picking out the right stocks or commodities to create a portfolio, he can use the help of his advisor to make returns on the index. (by index we mean a group stocks that you have chosen to track)

Your investment advisor would advise you to create a diversified portfolio by picking on a mix of stocks that can perform and protect capital. It is important for you to look at the performance of the index and not a particular stock. Again, staying invested is key to reaping returns. With time in his favour, Sukumar can really work with his financial advisor and create a portfolio that can reap more than average returns. A periodic analysis (a 6 month at the least) of his portfolio with his advisor is important and recommended. Stock markets rally with sentiment and react to even the slightest changes in policy.

Peer Pressure for Investing

Retail investors like Sukumar who have time in their favor must be prudent enough to not be influenced by peer pressure. He was introduced to the investment advisor by his colleague Prakash who trades online if not daily but on a regular basis. Prakash watches out for mid-cap stocks that rally and has wide circle of friends who also day trade. He logs – in to his trading account at 9.30 am sharp to see the how the markets have opened.

Prakash often talks about the profits he booked and the stocks he traded, on the day he makes a profit, luring other colleagues to take the same route. The truth is nobody knows Prakash’s initial investment into the stock market, his goals, his motive behind day trading and his cumulative returns or the growth of his investment. The only way to not give in to peer pressure is to stay focused on the investment goal and the strategy behind it.

Wealth creation happens only when money saved is well –invested to give you optimal returns. It is wealth creation first. Allocation of it for goals, comes second. Investments are all about Appreciation, Returns and Liquidity. So list your goals and let the investment advisor do the rest for you. Sukumar can also look at investing in Gold and Real estate. It takes a prudent investment advisor to design the right investment portfolio for Sukumar.

This article has been contributed by K.N. Sridharan, CEO WinRich