Rajesh Iyer, a 45-year-old businessman, has bought 25 traditional insurance policies for his retirement. These policies start maturing every year from the time he turns 61 years till 85 years, thereby providing him sufficient income for his retirement. Or so Iyer thinks.
Shweta Rao, a 36-year old school teacher has invested Rs 3 lakh in an eight-year fixed deposit scheme which offers 9 per cent interest. Rao was sold on the idea that the FD amount would double in time when her only son would begin his college education and so hopes to use it for the same.
Aman Sood, a 29-year-old software professional, has been investing a large part of his savings in stocks every month since last year, as he intends to buy his own house in the next two years and wants funds to make the downpayment for the property.
While it is good that these people have a specific goal and they have started investing for the same, they have not selected the right investments for their goals. While it is important to set goals in the first place, it is equally important to estimate the time frame in order to establish the year when you would like to achieve your goal/s.
For example, buying a house is a goal, but buying a house after three years is a specific goal. So once your time frame is established the next critical factor is selecting the right asset for investing. Given below are a few guidelines which can help you invest prudently to achieve your goals.
Short term goals: Short term period can range from one month to up to three years. Usually, short term goals can be buying a car or house, going on a foreign vacation, house repairs, and so on. When you are sure about these short term goals, it is better to invest in safe instruments such as fixed deposits and debt mutual funds for lumpsum investments.
For monthly investments debt mutual funds or bank recurring deposits are better. If you happen to fall in the 30 per cent tax bracket then debt mutual funds will be most ideal as you can take advantage of lower taxation and indexation benefits available in these funds.
Stocks and equity mutual funds should be avoided for short term goals due to their volatile nature. Stock trading is a highly skilled activity which requires time and regular study. Often people buy stocks with the intention to earn very high returns in the short term. But this could result in loss on your investment.
Medium term goals: These are goals within the time frame of three to seven years. Some of the above mentioned goals can also fall in this category. People in the lower tax slabs and looking for highest safety can go with fixed deposits, while those in higher tax brackets should invest in long duration debt funds and balanced mutual funds with 70 per cent allocation to debt funds and 30 per cent in balanced mutual funds.
Debt funds can comprise dynamic bond and income opportunities category including fixed maturity plans (FMP). Currently, even income and gilt funds, under the debt funds category, offer good investment opportunities, since interest rates are expected to fall. This will benefit these funds. But one must understand these funds well before investing as one will need to exit these
long duration funds when interest rates bottom out.
Long term goals: Having a time horizon of more than 7-10 years can be categorised as long term goal. Ideally, goals such as children’s education, retirement, and so on are long term goals and, therefore, one should add equity in one’s portfolio as equity has been the best performing asset over the long term.
Rather than buying investment oriented insurance plans for long term goals one can create a diversified portfolio of Public Provident Fund, stocks and equity mutual funds. Don’t forget to add 5-10 per cent of gold in your portfolio as it is a very good hedge against inflation.
Systematic investment plans in equity mutual funds will enable you to create a good corpus and the compounding factor will come in play in your portfolio. If you don’t have the knowledge to pick stocks then stick with good performing equity mutual funds.
For those in the higher income brackets and with huge surpluses, property can also be a good option. Seek expert opinion of a real estate consultant before you finalise the property.
By categorising your goals as per time horizon you can avoid any nasty surprises related to your investments.
Source: Chief Planner, Proficient Financial Planners