Investment Options for Your Financial Goals

In our earlier post, we had seen how important it is to write down your goals, it is important to even quantify them and set certain timelines to your goals. Now that you have quantified your goals and you have even set timelines to your goals, it is time you select suitable investment options for your goals. And in this blog, we are exactly going to do that, we are going to help you choose the right investment options so that you reach your financial goals.

Now, there are a lot of investment options available in the market like traditional debt instruments, debt funds, pure equity, equity funds, etc. But what option you ultimately choose for your goals depend upon 4 factors as below:

1. Time available/ investment horizon

2. Current financial position

3. Returns expected

4. Risk profile

Let us take an example to understand this better:

Let us say, you want your son to have his higher education in the US. The present cost is Rs. 25 Lakhs, you have 16 yrs in hand and future cost of the goal is around Rs. 74 Lakhs.

The first factor that influences you investment option is your time available or your investment horizon. In this case we have assumed it to be 16 yrs. Ideally for a financial goal which is more than 5 + yrs away, the asset class you should invest in is equity. So you could invest into pure equity or equity funds. But, let’s say there is someone who has only 2 yrs for his goal, equity cannot be his investment option as it would volatile in the short term. He would have to invest into debt funds or traditional debt instruments.

The next factor which influences your investment option is your current financial position regarding that particular goal. Take the same example, where you want your son to have his higher education in the US and have 16 yrs in hand. Let’s say you have not made any investments regarding this goal yet. As discussed, equity is the best asset class for such a goal and so you would need an SIP of 13,000 into equity mutual fund with returns expectation of about 12%, if you have to reach your financial goal. In case there is someone else who already has accumulated 10 lacs for this goal, he can put these 10 Lakhs into debt for 16 years which should give him around 8 % returns and he can start an SIP of 10,000 into a debt fund which should give him 8% returns post taxes. So, he has no need of concentrating his investment into pure equity since he does not need aggressive returns.

The third factor which influences your investment option is you returns expectation.

Referring to the same example where you have 16 yrs in hand for your son’s higher education and you need 74 lacs at the end, you have not invested anything yet. Like we said you have multiple options… you could start an SIP of 19,000 into a debt fund with returns expectation of 8% which will help you accumulate 74 lacs. But what if you cannot afford an 19,000 monthly SIP? You would have to take the risk of investing into an equity fund with an SIP of 13,000. Now when I am saying risky…I don’t mean equity is always risky….in the long term equity shows positive results. You will have no choice other than equity funds or you will have to compromise with your goal.

Now this factor that we discussed is directly proportional to our last factor which influences our investment option choice. And the last factor is one’s Risk Profile.

For someone who is very risk savvy an SIP of 13,000 into equity fund with returns expected at 12% would do…..but for someone who does not want to take much risk……would have to choose a less risky option like debt funds but would have to contribute a bigger amt which again depends on how much he can invest each month which is nothing but again his financial position.

So this is how you would have to check your current financial position, investment horizon, your risk profile and in turn your returns’ expectation to finally choose your investment option for your financial goal.

Hope this post will help you asses all these factors and help you choose a suitable investment option.

Define Your Financial Goals

Defining your financial Goals is an important step in Financial Planning Process. We all have dreams and wishes but to fulfill them we need to write down these Financial Goals and take step towards achieving these goals.

Examples of Financial Goals are Children Education, Children Marriage, Dream Home, Retirement Corpus, World Tour, etc.

The most neglected part of this process is writing down these goals. We vaguely remember these numbers but never sit down and calculate the actual amounts to achieve.

Quantifying your financial goals is an important thing and one should do it as early as possible.

e.g. Let us say you want to send your son/daughter to a reputed institute for MBA. Now a days the cost of MBA in a good college is between 20 to 25 Lakhs. Suppose your child is 5 years old now. So, he/she will require this money after 17 Years. Considering an inflation of 8% p.a., amount required for his/her education would around Rs. 75 Lakhs. 

See this is the dark side of compounding. When your money grows with compounding we feel so happy. But compounding plays the same role on expense part also. So, first define your financial goals then quantify them and start acting as early as possible.

Another important part in Defining your financial goals is segregating your needs from wants. First try and cover all your needs and then start planning for your wants.

Please find below mentioned are few examples of NEEDS and WANTS.

NEEDS: 

1. Retirement Corpus

2. Children Education

3. Children Marriage

4. First Home (For Occupancy)

WANTS:

1. Dream Home

2. World Tour

3. Dream Car

4. Farm House

Please watch below video to get more idea about how to define your financial goals.