Now, that everyone is going gung-ho about value investing and wealth management, have you assessed true worth of your investments? Periodic revisiting is needed for your financial plan to stay updated. This article will give some pointers to assess whether your investments are enough for your financial goals.
Setting of your financial goals
As we are going forward, we are assuming that you have already consulted your wealth manager or financial planner and have come up with a perfect investment strategy. If not, the following pointers will help you in the same
- Break your life-cycle needs into short term, medium term and long term. For e.g. daily expenses like food and grocery are short term expenditure, however retirement planning is a long term goal.
- Now assess the amount which can be saved and invested periodically based on liquidity needs. For e.g. if you wish to save for your kid’s education, then it would be better to invest the money in some kind of money back instrument or medium term instrument.
- Assess the tax effects of such investments and their income streams.
- Revisit the plan periodically to assess the effectiveness and efficiency of the plan to changed scenarios in financial markets and the economy as a whole.
Fitting your investments into financial planning strategy
Having divided your goals into periodic framework, now you need to allocate the assets as per periodic liquidity demands and maturity term of the instruments. For e.g. if you are planning to buy a home which you may consider as a long term goal, you may go for a long term housing loan.
- Short term financial goals
When you assess that you have liquidity needs in the short term ranging from one year to 3 years, you have to invest your money in the most liquid assets. Most liquid assets could be in the form of cash equivalents like bank fixed deposits or flexi fixed deposits or mutual funds having lock in period of maximum 3 years.
Interest rate for short term investment instruments is much lesser. However, there is no reason to back off, because these rates are constructed considering the inflation effect for short term.
- Medium Term Financial goals
This is the most complex area which will require careful analysis and asset allocation which will yield desired results. The time range could range from 3 years to 10 years. Most important objectives for such mid term financial goals would be protection and retention of existing investments as well as aiming for wealth appreciation.
The investment instruments for medium term financial goals could involve a dynamic asset mix which would have equity exposure and debt mix. The debt portion of the portfolio assets would give secured income stream, whereas equity participation would lead to above average returns.
- Long Term financial goals
Most important considerations while investing in achieving the long term financial objectives would be inflation effect and compounding effect. These are the factors which affect the wealth appreciation and income generation targeted in the long term, however both these operate in opposite ways. The Inflation effect tends to eat away the income, however, compounding effect results in wealth appreciation. The target time period would be more than 10 years, which could range from buying a house, retirement planning or children’s education etc.
How to assess whether your investments are enough for your financial goals?
- Your financial goals are dynamic in the sense that they keep on changing as your age progresses or in case of any unforeseen situation like an accident or sudden job loss, etc. For e.g. retirement planning can be a long term goal in the 20’s, however, the same could be the short term goal for an age group of 50 years and above.
- It would be better to match the maturity dates of short term and mid term investments and that of your liquidity demands. For e.g. if you are investing for your kid’s education which would be within 5 years, then consider a money back insurance (scheduled payback at 5th year) or mutual fund having lock in period of 3-5 years.
- Maintain cash buffer of at least 3 months salary or income to survive any unfortunate contingency or any other emergency. This will save you a lot of troubles in a scenario where you face disruptions in daily routine due to lack of funds. This will create a financial base which would save your Fixed deposits to be liquidated or jewellery to be sold.
- For short term goals, invest in such instruments which will not impose any premature withdrawal charges or fees on withdrawal. Even if these instruments pay lower interest, main factor should be the absence of premature withdrawal charges.
- For mid term goals, all you need to look out is the instrument which will not only retain the existing principal but will also lead to moderate wealth appreciation. You should ideally go for balanced risk where the risk reward matrix would be the moderate risk and reasonable rewards.
- Long term goals require wealth to be appreciated, to be set as its main objective. Compounding of income generated would be the USP of the long term investments. Hence, you would be more thrilled to look out for an option which would provide you attractive interest rate. However, greater returns bring along greater risks also. Hence, you need to factor for your risk appetite and inflation effect and you are set to relax.
Wealth management should not be one time exercise. Any financial planner would advise you to revisit your financial planning strategy. This would not only allow you to assess the growth and efficiency of the plan, but will also allow you to take corrective action if your investment plan is lacking anywhere. In such cases, you should consult your financial planner and devise a new updated strategy.
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