Things to consider before Investing
An Indian investor has many choices. In such a case, it makes sense to understand how to choose from the available options. The correct question to ask in such a case is, “What is suitable for one’s unique situation?” What is right for one person may not be appropriate for another. Also, what is right for one now may be different from what would be right at another point if the situation changed.
In order to see what suits you best, the two parameters that matter the most are:
1. Your financial goals
2. Your risk appetite
Your financial goals
Your financial goals are various events in life that often require large sums of money, e.g., buying a house, funding higher education, going on a foreign vacation, or purchasing a vehicle. The financial goals could also be related to funding regular expenses when income may not be available, e.g., funding retirement expenses or funding household expenses when one wants to take a break from a career.
1. The first step is to list down all the financial goals that one may have, or the family may have, if the finances are managed together.
2. After that, the goals may be categorized in terms of their importance. For example, someone may consider funding children’s education as a far more important goal in comparison to a foreign vacation, or retirement funding as a bigger goal compared to upgrading one’s vehicle.
3. Then, the financial goals may be categorized as per the time horizon—when the goal becomes due. The goals could be short-term, medium-term, or long-term.
4. For a youngster starting a job’s retirement goal would be a long-term goal, whereas the purchase of a vehicle could be a short-term goal.
Your risk appetite
How much risk can you afford to take? The risk in this case should be seen in terms of the following:
1. How much of a drop-in investment value can you withstand?
i) The market value of some investments may go up and down, due to which there could be periods when the value comes down. Would you be able to stay invested through such periods so that when the recovery happens, the value of your investments also moves up?
2. How long can you wait to get the desired investment returns?
i) Once again, it is almost impossible for anyone to know when market prices drop and when they recover. Do you have enough appetite to wait for such periods?
ii) What if a sufficient amount of money is not available at the time of the goal?
These questions help you gauge your risk appetite. An investment portfolio must be chosen in line with one’s risk appetite.
In case you are unable to do the above exercises yourself, it may be useful to seek professional help.
Reviewing and re-balancing the portfolio
Once you have invested, the job is not over. A periodic review of the changes in one’s situation would be necessary.
• Since the investments are made to achieve financial goals, it is necessary to review any changes in the financial goals or one’s financial situation. Reviewing your portfolio at significant milestones in your life, e.g., when you get married, have children, or retire, as your needs may change during such times.
• In the event of any changes in your situation, your goals, or the value of your investments, re-balancing your portfolio would be required. That makes sure the mix of investments is still in line with your objectives.