K. ARAVIND
ly, before choosing the right investment, one has to set one’s financial goals and the time frame to achieve those goals. He should also plan his taxes in such a way as to reduce his tax liability. Then he has to decide what kind of investment plan he needs to achieve each financial goal.
Here the investor has to go through three steps. Analyse his life first. That is, evaluate his financial status and where he stands financially. After that, setting goals is the second step. There will be immediate goals to achieve and goals that will take many more years to achieve. The third step is to separate each of these goals and make the appropriate investments.
Willingness to take risk is an important factor in deciding where to invest. Those who invest in various investment instruments that fluctuate in price will approach this fluctuation with different points of view. High risk investments are only suitable for those who approach this volatility with a practical frame of mind.
It is said that investing is the most effective when it is linked to your life’s goals. Looking ahead, the goals become clearer, such as the duration of the investment and the expected return. At the same time, some may not be clear about their goals. If setting goals seems like a daunting task, there are some easy ways to do it.
The way to do this is to divide our future income into four. Start with the long-term need first. This includes income that is required after 10 or 15 years. This includes children’s education, marriage, and post-retirement income.
Due to the long duration, it is not easy to estimate the amount required. If your child is now five years old, how do you calculate the amount needed for your child’s education after 12 or 13 years? It all depends on the course you choose to study and the increase in fees. Even if it is now decided that one course will be the one the child will study as an adult – for example, engineering – it will be difficult now to estimate how much the course will cost after 12 or 13 years. In any case, a large sum of money will be required.
The second is the need to come in a slightly shorter period of time. An example is buying or building a home in five years. The cost of such needs can be calculated more accurately. If you put up a house in five years, you can only estimate the initial payment for it.
Third is the funding for emergencies. Examples of hospital expenses that do not receive adequate insurance coverage. Most people do not bother to set aside a fund for emergencies. An emergency fund equal to the income of the family for a period of three to six months can be considered.
The fourth is the cost of tax-saving investments. The cost of this can be calculated based on your income. It remains to be seen how to invest in these four types of needs. The first is to invest in mutual funds’ equity funds to meet the long-term needs mentioned above.
Although there is a risk of finding a huge amount after a long period of time, there is no better way than stocks and equity funds. The latter can be invested in balance funds or debt funds for the above purposes. These funds can offer higher returns than bank FDs.
The third purpose is to invest in bank savings accounts or liquid funds. Some fund houses have the facility to withdraw money from liquid funds at any time. Higher returns can be obtained from liquid funds than from savings accounts.
For the fourth purpose, various products can be selected from term policy to ELS based on various factors such as income, insurance and capital growth.
