If you list the goals you are saving for, attainting them becomes easy
VARIETY is fast emerging as a bitter pill for investors. Just like shopping in a departmental store becomes tedious with dozens of choices on offer, the same often occurs in the investment market, but the effects are even more substantial with bigger consequences. Financial Chronicle talks to experts to tell you how to simplify and choose from the array of mutual funds, insurance products and company deposits available in the market.
The cornerstone of any good financial plan is a sensible, personalised asset allocation strategy.
For a common investor, the classes of investible asset are – real estate, gold, equity and debt. Each of them have their own distinct track record of risk and reward.
Understand yourself:
If you list the goal for which you are saving, attainting the target becomes much easier.
However, understanding one's risk appetite may be difficult.
Your ability and willingness to lose some or all of the original investment in exchange for greater potential returns is your risk appetite.
Slot yourself as a conservative investor (not at all comfortable taking risk) or a moderate investor (can take reasonable risk) or an aggressive investor (very comfortable taking risk to earn extra return). Based on your risk appetite and your investment horizon, you can figure out the allocation of your savings into equity and fixed instruments.
For example, if the tenure is very less and risk appetite is very low, then the proportion of fixed income instruments will be more and that of equity will be less. Simultaneously, if the tenure is long and if the risk appetite is more, then the proportion of equity will be more as equity is known to perform better in the long run.
Keep it simple:
Depending on the time frame, risk appetite and liquidity needs of the investor, a plan should be formed and any investment should be made within the parameters of this asset allocation plan.
Many investors holding dozens of MF folios and several deposit products in their portfolio… What investors should do is select a handful of 'best-of-breed' products and stick to them (in terms of additional investments) for the long-term rather than going after 'flavour-of-the-month' products that will invariably keep coming up.
Know what you eat:
You must completely understand the investment that you are making. All pros and cons must be thoroughly understood before making any investments.
It's not that every new product will be better in terms of performance unlike the existing ones. It is good to diversify, but do not over diversify. Diversify as much as you can track and manage. As they say, too many cooks spoil the food.
Consult a wealth doctor:
Your financial advisor is your `wealth doctor'. Be true to him/her to get the best investment solution.
Trust your financial advisor and ask him why you are investing in what is suggested and how it suits your investment criteria.
Speak to a financial planner. If he starts recommending (selling) products within five minutes of your conversation, avoid him/her.
Products after everything should fit your financial plans, which have to be simple, easy, flexible and devoid of any charges or commitments.
Evaluate your investment at least once in a quarter. If the committed or expected returns are not visible, then change your advisor. Haven't we heard of `second opinion'?
