A Disorganized Approach Can Be A Cost To Your Investment

It is promising to see an increasing number of investors following the right investment strategy to ensure that they have adequate financial resources at critical junctures of their lives. However, there are still a large number of investors who do not consider it necessary to plan their investments. While some of them invest very conservatively to protect their capital at all times, there are others who invest quite aggressively to make easy money. 

Needless to say, both the approaches expose investors to different types of risks. While ultra-conservative investors end up compromising on their long-term goals, the aggressive investor often makes irrational investment decisions in their pursuit for the ever eluding financial windfall.  

The key, therefore, is to adopt an investment strategy that creates the right balance between risk and reward. Asset allocation i.e. investing in different asset classes based on one’s time horizon, goals and risk taking capacity is one such strategy that keeps risk within one’s reach.   When it comes to choosing the right investment options, mutual funds score over others on most parameters. Of course, the key here is to choose the right funds and monitor the performance consistently. 

Having a financial plan in place and a strategy to implement it allows an investor to allocate appropriate sum of money for his different needs and requirements. In other words, financial planning helps in making informed money management decisions to secure one’s financial future. A financial plan lays down the allocation of savings across various asset classes to achieve an appropriate risk-reward balance.

There are certain basic requirements for approaching financial planning such as defining and setting goals, incorporating risk management, understanding the effect of each financial decision and being realistic in terms of expectations.

Defining goals 

Defining goals i.e. short term, medium term and long-term is critical as it helps in directing the entire effort towards achieving them. By setting a target for each of the goals and assuming a rate of return based on the proposed asset allocation, one can work out the amount that needs to be invested to achieve these goals. 

While starting the investment process early and in the right manner is important, it is equally important to monitor its progress. It helps one to create a separate portfolio for each of these goals. This ensures total control over the goals and the progress made towards achieving them at all times. 

Don’t ignore risk management

While many investors do alright in terms of their investment process, one area they often ignore is risk management. This can be quite unsafe as it is critical to cover risks relating to one’s life, health and property. Therefore, before starting the investment process ensure that these risks are adequately covered. Remember, buying the right insurance policy is equally important.

Paying high premium for a traditional insurance policy often makes one to compromise on the quantum of risk cover as well as investment returns. A term insurance plan scores over traditional and unit linked insurance plans, both in terms of quantum of insurance cover as well as costs. Therefore, it is always advisable to separate insurance needs from investment needs. 

Creating an emergency fund equivalent to your six months expenses is also a crucial part of risk management. Emergency fund ensures that investment process is not disturbed when one faces some unexpected changes in life.  

Remain committed to asset allocation 

A goal- based investing can help a great detail in ensuring that one invests with a clear time horizon and avoid making abrupt changes in the portfolio. The asset allocation process, which is an integral part of financial planning, largely determines the level of risk and the likely returns expected from the portfolio. 

Don’t make a mistake of underestimating risk or overestimating reward from an investment. One needs to be careful about this aspect of investing. By estimating the risks associated with each of the investment options, one can improve the chances of building a greater wealth. 

Hemant Rustagi
CEO, Wiseinvest Advisors