Set your sights on the goal first, rest will follow

If you were to drive to any place, you would simply follow the Google map and take the best possible route. There can be different routes to reach the same destination. Depending on your destination you would also get a fair idea about the amount of fuel and time (including halts) required to complete your journey.

Similarly, is the case with investments. Hence, first you need to determine your destination i.e. your goals and accordingly plan the other aspects such as investment amount, tenure, product and solutions. Why and where to invest is as important as how to invest.

The three key points to consider while planning your finances should be:

Fix your goals

Determining the goal for which you wish to invest, is the core of financial planning. Once you have set a goal it becomes easier to put the remaining pieces of puzzle together. Individuals can have different goals at different stages of life. You may have a short-term goal – such as plan to buy a high-end gadget, or go for a vacation etc. or medium-term goals such as – upgrading to high-end car, foreign vacation, savings for own marriage or marriage in the family or long-term goals – such as buying a house, retirement, securing children’s future etc. It is always easier to plan for something once you know what is it that you are trying to achieve.

Identify the asset class

Once you have a set goal, you can select the asset class based on the tenure of investments and one’s risk appetite. If your investment horizon is more than 10 years you can look at investing in equity funds, if the investment horizon is between 5 – 10 years you can look at investing in equity oriented hybrid schemes and for investment horizon for less than 5 years you can look at debt or debt oriented hybrid funds. As equity funds entail relatively higher risk, it is advisable to invest in equity funds for longer investment horizon.

Determine the investment amount

Now that there is clarity on the goal, investment horizon and asset class, next step is to determine the amount of investment you would need to achieve the desired goal.

Investment amount is a factor of the corpus you wish to build, investment horizon, your current standard of living and expected inflation. Remember, the key here is to start investing today. Don’t let your current constraints deprive you a better tomorrow.

Possibly, there may be limitations to your investment capacities today, wherein you may feel that you do not have the desired funds to invest for your goals, but you still should take the first step by starting investments with a lower amount and then gradually as your income grows you will in a position to invest the desired amount to achieve your goal.

The process doesn’t end at determining the right investment amount, as it may all go in vain if it is not reviewed periodically. Hence, reviewing the investments on a periodic basis with change in income, lifestyle and changing market conditions is equally important to track the progress and make corrective measures if necessary.

The preferred way of investing to reach any goal is through Systematic Investment Plan (SIP) i.e. investing a fix sum on a periodic basis. The SIP amount should be periodically increased with the corresponding increase in your income, this way you are able to preserve the purchasing power of money.

Also, any additional windfall gains, such as bonuses or incentives should be used wisely as a lump sum investment to boost your portfolio.

Further, in the withdrawal phase it is advisable to choose the Systematic Withdrawal Plan (SWP) facility as it helps to meet your requirement for regular cash flows along with potential capital appreciation on the balance investments.

Most of the investors have a rear-view mirror approach to investments, meaning their investment decisions are based on the past performances of a fund. However, it is important to understand that past performances are not reflective of the future performance.

Hence, instead of deriving your investment decisions on the past performance of a fund you should place more substance on the suitability of the investment to your investment goal, pedigree of the fund house and consistency of the fund
manager to deliver returns over the long-term.

(The writer is ED and CMO at SBI MF Domestic Business)