Investment product must suit your goal

Ibuprofen is a medicine that works well to treat inflammation (severe pain) and fever. A dengue patient with similar symptoms, that is, severe body ache and fever, if treated with Ibuprofen will most likely die.

A classic case of same symptom – same medicines and yet a very drastic and opposite outcome. It is not the product that causes destruction, most often the ill-application of the product causes more destruction that the product itself. It is no different when it comes to investments.

Purpose of funds – Each investment products are designed to suit a particular purpose or objective. A clear understanding of various mutual fund categories will help people choose the right set of products for their goals or the time horizon of investment.

Ignoring investment risk – Unfortunately most people try to pick funds that have delivered maximum returns in the past. Theoretically, they only buy returns and either fail to estimate or completely ignore the associated risk with the products.

Choosing right investment products – You have five different modes to commute (that is, walk / bicycle or bike/ car / train / airplane) and assume you have five different travel goals (that is the distance:

• To the grocery shop 500 mt away from your house
   
• Within city limits of 50 km
   
• Inter-state (say Delhi to Agra – 225 km)
   
• From Delhi to Kolkata
   
• From Delhi to London

Which would be the most preferred and efficient mode of transport for each travel destination? Even the richest person on earth will not fly an airplane to the local grocery shop; neither a rationale person will attempt to bicycle from Delhi to London. You may perhaps not reach your destination or even if you do it would take a very long time to get there.

Picking the most efficient mode of transport is a no-brainer. Unfortunately, make this mistake when it comes to their investments. Many invest their long-term money (money that they may not need in the near future) in short-term deposit and keep renewing it. This is sub-optimal utilisation of your resources, similar to cycling from Delhi to London.

Even if you want to, you cannot take a train or an airplane to the neighbourhood store. Yet when the market is in a bull run, many try to invest in equity markets for a short period of time, thereby subjecting their investment capital at risk.

For choosing the right investment category break your goals into short-term, medium-term and long-term:

(1) Short-term goals (less than 5 years)

(a) Conservative / first-time investor - Debt funds / monthly income plans / equity savings

(b) Aggressive investor - Debt funds for goals that mature within three years. Equity savings / balanced advantage fund for goals that mature between four to five years

(2) Medium -term goals (five to 10 years)

(a) Conservative / first -time investor - Balance advantage fund or / balanced fund

(b) Aggressive investor - Balanced fund / large-cap equity fund / multi-cap equity fund

(3) Long-term goals (more than 10 years)

(a) Conservative /first-time investor - Large-cap equity fund / multi-cap equity fund

(b) Aggressive investor - Multi-cap equity fund / mid-cap /small-cap fund

Don't get scared of market volatility. If we encounter turbulent weather while travelling by air, we simply fasten our seat belt. We do not jump out of the airplane. Most often the pilot navigates it safely to the destination. The equity market turbulence, called volatility is a part and parcel of equity market investing. Holding your nerves and being patient will help you create wealth over long term. No equity fund in India has ever given a negative return over 10-year time-period. So have patience, stick to your investment plan and ride the volatility to create wealth.

The writer is founder and CEO, FINCART