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Don't rely on investment advice from family, friends

In an ideal scenario, one should start investing at an early age; at least 30% of the earnings should be invested; and proper asset allocation should be maintained as per the risk profile of the investor

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"The new year stands before us, like a chapter in a book, waiting to be written. We can help write that story by setting goals", Melody Beattie. The above quote aptly describes a newbie investor, who is looking for ways to embark into the journey of investments and financial freedom.

Investing is a process, which when well laid out, reaps fortune; while if deviated from, may result in a fruitless journey with no achievements. In general, first-time investors seek counsel from friends or relatives to make investment decision without fully understanding the financial product, risk and return structure and sans financial goals.

Risk profiling is a must

Risk profiling is the first step required, before undertaking any investment decision. This should be followed by a well-laid out financial plan marking clear financial goals. While preparing the financial plan the assistance of a financial advisor is highly desirable. The financial advisor shares an understanding of the risk and return from asset classes (equity/debt/real estate/alternatives) while also drafting the financial road map adhering to an optimum asset mix/asset allocation.

Goal-based asset allocation

Once the risk profiling of the investor is completed, the advisor should draft a clear outline for the financial goals and the time period in which the funds should be made available to the investors. The time period and risk profile of the investor will guide to an optimum asset allocation. For example, the client requires money to buy a car after eight years, with an estimated future value of Rs 15 lakh. The suggested allocation can be done in equities (MF/direct equity) for seven years. The corpus generated after seven years can be withdrawn and put into short-term bond funds for one year, the the precise time when he will require the corpus to buy the car.

The investor should be made aware that equity as an investment is volatile in the short term, while over the long term (five to seven years) the volatility smoothens out and he can grow his corpus at an average rate of 14-15% CAGR. Any short-term goal of less than three years can be achieved when investments are made in a combination of bond funds (which have comparatively lower volatility than equity).

Core ideas of investment process

Three core ideas which should always be a part of the investment process should be the creation of a contingency fund, a retirement corpus and the mitigation of risk through insurance. Contingency reserve should be the cumulative amount of six months' expenditure, which should be placed in a liquid mutual fund and acts as a buffer in case of any emergency.

Retirement corpus, the most neglected part of an investment plan, should be compulsorily looked into. Generally investment made through the Systematic Investment Plan (SIP) method helps to create a larger corpus over long term, along with the advantage of rupee cost averaging. Investors should remember that it is the power of compounding which actually helps to create a bigger corpus.

Medical insurance as well as life insurance complements a perfect investment plan, thus acting as a shield in case of emergencies.

To summarise, financial goals and the creation of a future corpus is primarily dependent on three factors the amount of principal invested the rate of return at which the corpus grows and time period for investment.

In an ideal scenario, one should start investing at an early age; at least 30% of the earnings should be invested; and proper asset allocation should be maintained as per the risk profile of the investor.

NEW TO INVESTING

  • First do the investor’s risk profiling, following which a financial advisor can recommend goal-based asset allocation
     
  • Contingency fund, retirement planning and risk mitigation through insurance are must in financial plan

The writer is CEO of Karvy Private Wealth

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