The common investors can invest his disposable income in a scientific manner to make funds available at the right time in his life. We are flooded with a bewildering variety of investment options to park our surplus. Investing decisions never seemed so complicated. Every day we are bombarded with investment advisors who in turn frighten us into an insurance policy or confidently assure you of 100% returns from an equity mutual fund!!! Amidst all this hype and hyperbole lets examine how should an investor go about investing his disposable income.
The first step is to decide when and for what purpose would we require money at a future date. All our dreams, hopes and aspirations require funding at some point of time. Our goals can be anything under the sun. It could be savings for retirement, a world cruise in the ‘Libra’or visit Himalayas on a shoestring budget. These have to be itemized as financial goals and committed to paper along with the time available for each goal. The longer the time period the lesser we have to invest every month for that particular goal. Investing for one goal does not automatically eliminate other goals. One can concurrently invest for many goals of differing time periods.
The next step would be to choose the right investment for each goal according to the time available and risk profile of the investor. There are three basic investment categories or asset classes: equity or variable income securities, debt or fixed income securities and cash. The key to investment success is in understanding how each asset class performs over time subject to their inherent risks.
All asset classes whether bonds, fixed deposits, public provident fund, insurance policies, equity and mutual funds can be easily judged according to three fundamental characteristics - safety, income and growth. Each investment has these characteristics to a smaller or a larger extent. Typically an investment with high safety factor say fixed deposits would yield lower returns than equity and will not give growth in invested capital in the form of capital gains. An equity investment with higher growth potential will however carry higher risk. So, while it is possible for an investor to have more than one of these factors in his investment, the success of one must come at the expense of others. Some portion of our disposable income must be kept in cash to provide for monthly expenses, emergencies and help us take advantage of good investment opportunities.
Risk profiling of an investor is nothing but gauging his ability to bear risk. The possibility of greater returns comes at the expense of greater risk of losses. An investor having heavy loan repayments or having to take care of aged parents will have lower ability to bear risk of loss of capital. A young investor having a longer working life and lesser responsibilities can easily withstand a loss of investment. So, risk in common parlance means the ability to withstand a loss without affecting the existing lifestyle of an investor. Typically investors fall into three risk categories of conservative, moderate and aggressive. A conservative investor’s portfolio will consist more of debt, which gives him a steady foreseeable income and safety of capital. The proportion of equity in a portfolio increases as the risk taking ability increases.