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.
