A financial plan is unique to each person - what works for one person may not work for you. But before we decide which investment to invest our money in, we need to keep 5 key factors in mind. It is essential to think about each of these factors in detail, as it makes it easier for us to decide which property we should invest in. That is exactly what we will discuss in this blog. What are these 5 factors of goal-based investing, and how to make a financial plan accordingly?
We'll also talk about how to set money goals, and where to invest in relation to your financial goals, such as retirement, family planning, etc. Personal finance management is important for everyone, and we should know where to put our money - stock market, mutual funds, small matters, etc. Keeping in mind the Rule of 72 and the power of compounding. Long-term investments and short-term investments differ in many aspects, and each of them requires different financial planning. The type of investment also depends on the underlying nature of the investor, and where they are comfortable investing.
5-step plan to analyze every investment such as Stock Market, Small cases, Mutual Funds, Real Estate, etc. Goal-based investing is explained to beginners. How to define your financial goals? Learn about financial goal setting, and personal finance management and what questions should you be asking in order to make an investment decision? in this Blog
Here are the five questions to ask before you invest in a Mutual fund, Stock Market, or Goal-Based Investing
Introduction - Investment Decision Question and Answers
Do You Know What You're Investing In?
Investing in the stock market can be a great way to make money. But before you start investing, there are a few things that you should know. The first question that most people ask themselves is: "Where do I want my money invested?"
Mutual Fund: If you're looking for a place where your money can grow and be managed without any work on your part, then mutual funds might be the best choice for you. Mutual funds are investment vehicles that pool investors' money together and invest in stocks or bonds to produce returns.
But Investors are often puzzled when it comes to investments in mutual funds as there are plenty. All funds come with their pros and cons but all investors have different objectives and requirements and should invest according to their investment goals. But before you start investing, you must first decide the category of mutual funds, i.e. equity, debt, or hybrid funds you want to invest in and what will be their respective sub-categories. Then, you can choose from a variety of funds based on certain parameters. In this blog, we will discuss the major factors that an investor should consider before investing money.
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Small Case Goal-Based Investing: If instead, you want a more hands-on approach and want to build your own portfolio of stocks, then small case - Goal. Small Matter is a goal-based investment platform that gives you the opportunity to invest your money in a way that is in line with your financial goals.
The small case allows you to choose from three investment options:
- A riskier portfolio with a higher potential return.
- A more conservative portfolio with steady returns.
- An even more conservative portfolio with lower returns but less volatility.
5 Questions to Ask Before Making Any Investment Decision
There are many ways to invest in the stock market, Mutual Funds, or in Small cases- Goal-Based Investing but before you invest, What are some investment questions? we should ask what are the questions investors ask before investing? or What is good questions to ask about an investment? That's what we're going to go through in this BLOG. This blog will help you to ask the right questions before investing in any financial product and in turn, will not let you fall prey to wrong selling.
What are you saving for? - What are your goals? - How much risk can you tolerate? - How much time do you have until retirement or another goal date? - What are your current assets and debts? with an example.
What are the 5 questions to ask before you invest?
1. What are you saving for?
Firstly we should define our investment goal For example, if we want to collect money for retirement so is our goal. If we want to save for children's education, then that is our goal. if we want to save money for our kid's weddings. So these are our long-term goals similarly, there are short-term goals also.
For example, if you are planning to go on vacation after 1 year that's your short-term goal you would like to invest or save money or you have to buy a car after 2 years that too is one of your investment goals. If you want to buy a house after 5 years, that too is your investment goal.
So, first of all, we should define our goal in fact, in technical jargon, we also call it goal-based investing. In this blog, we are going to talk about how goal-based investing is done. The first question is that firstly we have to define our goal
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2. What are your goals? or Goal Setting
We have to ask the question that how much money is required for that goal and how do we find it out for that too let me tell you a very simple formula. Suppose on today's date you think that for retirement, according to today's date money, 1 crore is needed. So how much money is required after 24 years or after 25 years.
There is a very simple formula for that you must have to understand the rule of 72.
2 a. What is Rule 72 and how does it work?
The rule of 72 is a simple way to determine how long it will take to double an investment given a fixed annual interest rate. By dividing 72 by the annual rate of return, investors get an estimate of how many years it would take for the initial investment to duplicate itself.
In that rule of 72, put an inflammation of 6%. So 72 divided by 6 is in every 12 years, whatever your corpus amount is as of today's date double that amount so you will get an inflation-adjusted amount.
Based on today's date, you wanted Rs. 1 crore so after 12 years, you will need to double it. This means after 12 years you require 2 crore rupees. After 24 years, it will double, so, you would require Rs 4 Crore this is only an example.
Every person has a different lifestyle and maybe one crore can be sufficient for someone. Somebody says that I want 5 crores of today's era. So similarly, you can multiply your amount accordingly. Now we consider as an example that for retirement after 25 years we need ₹5 crores so we have set a target amount here according to your goal.
3. Time frame for Investment.
How much time do you have until retirement or another goal date? The third question comes from how many time frames we want to invest the money. As we just saw in our example we are planning for retirement after 25 years. At that time you want Rs 5 crore. So here our investment horizon i.e. time frame is 25 years. Similarly, if we want to plan our children's education after 10 years so for maybe we need Rs.15,00,000 so your time frame is of 10 years. If we want to buy a car after 3 years, then your time frame will be 3 years. If I want to go on vacation next year then your time frame will be of 1 year. So first we have to decide on our investment goal and then how much amount will be required for that. In how much period do we want that money, we have decided it
4. How much risk can you tolerate?
On the fourth number, the risk and returns what is our risk appetite, and what returns we are expecting from our investment? Risk appetite also depends on various factors. For example, If anyone is in their 20s. So their risk-taking appetite is a bit high because he has a lot of time. Many of his goals are going to be long-term. So they can invest money in higher-risk investments.
On the other hand, If someone is in their 50s. He is very close to his retirement so if their risk-taking capacity becomes slightly reduced you should plan your investment accordingly.
Apart from this income level also defines risk appetite If someone's income is too low that means there is very little money left to invest. So he does not want to invest money in high-risk investments. There is also a comfort level if someone feels that I do not have much knowledge about the stock market. I find those very high-risk investments. So he may not invest that money because he is not getting the comfort level there.
And the size of the investment portfolio. If someone has a portfolio of crores so it becomes easier for him to take risks, and for him, the risk appetite is increased by considering all these factors, we must first analyze our risk appetite for which investments fall in our comfort zone? We all know that higher returns come with higher risks.
For example, the highest returns come in the stock market. So the risk is also a bit high. But when we talk about the long term our risk is greatly reduced because in 10 to 20 years the market has to go up. So in this case our risk is not high that's why if our time horizon is short If it is 2 to 3 years, then the stock market is not that suitable for us. So we should analyze all these things in advance.
The second thing is when we calculate our returns we should adjust all our costs too. For example, if we are investing money in mutual funds we should find out how much the expense ratio is coasting there. If we are investing in a small case, then we should also know how much it will cost us. If we are investing money in direct stocks so how much will our trading charges cost we should know this too. Apart from this many investments also include tax. You must also calculate that tax whenever you are planning to invest Such as in stocks, mutual funds, and real estate Capital gains tax is levied. So only after this calculation is the return that is made That is what we have to keep in mind. Now we're talking about all the questions We will also take an example of how we can execute any particular investment goal Will also see step by step.
5. Gain Financial Knowledge
Now let us turn to the fifth question. It is also very important. that how much effort is required in any investment that is, do we have to update the skill?
Do we have to gain knowledge? Also, how much time will we have to spend on research and to invest in it? If we talk about examples here if we invest money in the FD, small savings, PPF So then very low efforts are required similarly if we invest money in the bonds investing money in mutual funds also requires very low efforts. You can generally treat all of this as passive income.
If we talk about medium effort where you have to put some effort into researching or managing those investments. such as a small case or real estate When you invest in real estate so, in, you have to manage rental properties, and when you invest in real estate. you have to do a lot of research or you also spend a lot of time managing that property. Similarly, you will have to do some research on the overall small case as to the type of investment you wish to invest in.
Goals of Investment
So broadly these were our 5 questions. Now let's talk about our example
Goals of Investment Here there are 2 types of goals long-term goals and short-term goals. Here will tell you about short-term financial plans example, short-term financial planning, Is investing best for short-term goals? How do you set long-term financial goals? long-term financial goals examples etc.
What are short and long-term financial goals?
1. long-term goals.
Suppose someone is collecting money for retirement. As we saw in the example, after 25 years we need ₹ 5 crores so how we will gather this? 25 years is a long horizon period where we can take a high risk. So in this case, we can do maximum allocation in equity. That means 70% of the money can be invested in equity. That is, you can invest in the stock market and mutual funds. The remaining 30% of the money can be invested in debt mutual funds or bonds.
There can be another way some people are more comfortable investing in real estate than gold. So let's say someone says that he will invest his 50% of the money in the real estate I have to create rental income. That's also not a bad idea, it can be done. Somebody says I want to invest 20% of my money in gold, it is very comfortable. You can invest in it too.
The rest of the money let's say 30% is left You can invest that in up stocks. How much percentage to invest in which investment? You can invest according to your requirements, based on your appetite But broadly If we see, our long time horizon our risk appetite automatically increases. Because in the long term, we know that risky investments. For example, If I talk about the stock market, it gives good returns in the long term. So you can consider the stock market here. whenever we have long-term goals.
Here we are only talking about retirement. Your children's education can also be a long-term goal. After 10 or 15 years, you may need Rs 15-20 lakh. When you send them to college or if you want to get them married. After 15 years, you will need a corpus for that too, or maybe after 10 years, you are planning to buy a large house. So you can start investing for its down payment as well.
2. Short term investments
Let's say I have to go on vacation after a year so it is a short-term investment for me or after two to three years I have to buy a car for that let's say I need ₹ 7,00,000 So in such a case, I would not invest a lot of money in the stock market. In this case, I will invest in FD bonds, and debt mutual funds I know that after 2 years I will get a fixed amount of money I am being promised fixed returns. Stock markets can also become shock markets in the short term. Because in the short term, we don't know where the market will go. The volatility is very high here. So if I need some money only after 1 or 2 years. I would not like to invest money in the stock market. But here's another disclaimer If you work in the stock market regularly and track it regularly. You are quite confident about your stock market investments. So you can also invest in the stock market even in the short term
Conclusion
So these are 5 Questions to ask yourself when Investing in Stocks & Mutual Funds. First of all, we have to decide our investment goal We have to decide how much money we need for that goal That is our target Corpus What is our time frame going to be? What is our risk appetite and what are the expectations of our returns? And fifth, how much effort is required I hope you must have found this blog useful.
keep learning, keep earning, and be happy as always.
