Sounds confusing, but after a little introspection, you
get the answer. I am sure most of you would be implementing the second
option i.e. invest first and then plan accordingly to meet your future
goals. People invest in different asset classes and investment options;
and then plan to allocate those investments for achieving their goals.
This is the most common mistake investors make. The right strategy and
option is to plan for your future goals and then invest accordingly for
achieving it successfully.
Like Shekhar who is keeping
all his savings in a fixed deposit which, he plans to utilise for his
daughter’s marriage after 10 years. But do you think his investment will
suffice for his daughter’s marriage. Will this amount after 10 years
beat the inflated cost of marriage?
That is the reason why you need to plan first and then invest
Why do you need to plan?
It is very important and necessary to
plan before investing because you need to know the exact asset
allocation required for achieving your goals. You need to know when and
where your money needs to be invested. Asset allocation depends on the
duration earmarked to achieve your goals and your risk appetite. For
your short-term goals, you should invest in debt instruments, while for
long-term goals you can have an exposure to equity depending upon your
ability to take risk. Asset allocation also helps you to diversify your
portfolio.
Your investment
should be able to beat inflation. It means that investments made by you
should fetch you higher returns than the rate of inflation so that the
future investment value helps you to achieve the inflated (raised) cost
of your goals. Your investments should not be eaten up by the rising
inflation.
You should also
know that whether your existing investments will bear fruits in future
and how can these be allocated to achieve any of your goals. Most of the
people invest by taking advice from their friends, relatives,
colleagues or agents.
People
usually mix investment and insurance by buying ULIPs or traditional
plans. You need to separate your insurance and investment requirements
as both serve different purposes.
Generally,
people mindlessly buy insurance policies, but they don’t know whether
they really require that amount of life cover or is it just inadequate.
Insurance should also be an important part of your plan. You should have
an adequate insurance so that in case of your untimely death, your
family doesn’t suffer. The family need not compromise in their lifestyle
or their goals even when you are not there. The insurance proceeds are
helpful in fulfilling the goals. As a thumb rule, a person should have
insurance of 10 to 12 times of his annual income. But need-based
insurance approach is always suitable, since it takes all your assets,
liabilities and goals into consideration. You also need to see that you
have adequate health insurance coverage as well.
You
also need to take into account tax aspect of your investments. You have
to take care of the taxes applicable on your investments. Generally
people open their eyes at the end of the financial year and hurriedly
invest to save tax. It is better to take care that you do not invest in
excess in tax- saving instruments, which unnecessarily lock your money,
nor in deficit that you end up paying more tax.
Thus,
it is necessary to plan before investing for successfully achieving
your goals. If you think it is difficult for you to plan, then nowadays a
lot of financial planners are available, known as Certified Financial
Planners, who specialise in making customised financial plans keeping
your income and goals in mind. Accordingly, he suggests you suitable
investments which are good enough to successfully achieve your goals.
As it is said “you should think before you act”, you also need to "plan before you invest".
Published in - Moneycontrol.com, The Tribune, Myiris.com
