When it comes to making investments, we often see that people follow their friends, family, and colleagues. Or they simply listen to their bankers, which can be big mistake.
But this approach is not one that will lead to financial success. One size does not fit all while investing.
Instead, you need to build an investment portfolio that is right for you.
Building an investment portfolio requires a fair amount of your thought and time. The need for the latter is only accentuated in light of the overwhelming choices available. In this article, we present a 4-step top-down strategy that will help you invest smartly.
Let’s get started.
1. Know Your Objective
Before investing, you need to first know why you are investing. Once you have identified your investment objective and also your investment horizon or tenure, you can then know which asset class you are going to invest into.
For example, consider someone who has a surplus of Rs. 1 lakh to invest.
The first thing this investor should check is, will he / she need this money anytime soon? Or can it remain invested for at least 3 to 5 years? If it can stay invested and will not be required for at least 3 to 5 years, the investor can invest it largely into equity with smaller exposure to gold and debt.
So before investing, you need to ask yourself - what am I investing for?
At any given point, there are likely to be multiple investment objectives that you wish to accomplish, ranging from buying a car to providing for retirement. And each of those objectives will have to be achieved over varying time frames. For instance, buying a car is a relatively short-term need, while retirement planning is long-term in nature. Depending on your goal, and your goal’s time horizon, you will know which asset class to go into.
2. Steps to Take to Achieve Your Objective
Once you have defined the investment objective, the next step is to outline a plan to achieve it. While there are a range of investment options (stocks, mutual funds, small savings schemes, fixed deposits, gold, real estate) available, mutual funds should suit a majority of the investors. Mutual funds are managed by professional fund managers and can be expected to do a better job at managing money than most investors. By investing through the mutual fund route, investors are left with time and energy to pursue their own work.
You can invest in equity, debt and gold through the mutual fund route.
Depending on your investment objectives you can select the mutual fund option most suited to you. Typically, for a long-term investment objective like retirement planning you can take risk and equity funds can prove beneficial. For short-term needs like saving for a car, debt funds are your best bet.
3. Select the fund house/AMC
Once you know that you want to achieve your investment objective the mutual fund way, it’s time to select the right fund house/Asset Management Company (AMC). With an increase in the number of fund houses/AMCs, choosing the right one can be challenging. However, this is easier said than done.
Why is it necessary to invest in the right fund house? Because the fund house must first qualify as a viable investment proposition before its schemes can attain that position. While short-listing an AMC, look for the ones that are process-driven as opposed to individual-driven. Processes are more enduring and serve investors well over the long-term. Individuals (read star fund managers) can be expected to perform only till the time they are associated with the fund house, once they leave they take the performance with them.
4. Select the scheme
Once you have chosen the right fund house, the next step in the investment sequence is to select the right mutual fund scheme. Like with the fund house evaluation, there is an elaborate process to select the right mutual fund scheme. Put briefly, mutual fund schemes are selected after they have passed the test on various parameters like risk, returns and performance over market cycles, especially the downturns.
These are some of the basic steps while investing. Adherence to these steps can ensure that there are fewer surprises along the way. Taking short cuts may prove detrimental to your financial plan. Of course, given that your financial planner is always around to guide you, taking the step-by-step approach to investing should not prove very difficult.