Any individual has dreams for self and for those dear to him with regards to quality of life. Here money plays an important part in making them come true. So it is critical that the individual invests his earnings judiciously, so that they grow at a rate that can make a difference in his and his family lives. We work hard to earn and most of us do not invest with the same intensity and seriousness. Many of us also delay investing, either for fear of choosing the wrong investment option, or because we are convinced we donâ€™t have enough money to begin with.
The truth is that investing is a process, not a one-time activity. And one donâ€™t need to have a large sum of money to start investing; options like mutual funds not only allow an investor to begin with a modest sum, but also provide plenty of options in terms of variety, liquidity, flexibility, tax efficiency and professional management.
Although investing is a very simple process, it still requires planning perseverance and time commitment. In this article we are outlining some simple strategies to ensure success on a consistent basis.
The first strategy is to plan investments is not to invest without determining investment objectives, the right asset allocation, and the best vehicle to achieve each of these. There are three simple steps to draw up an action plan. First one must list personal and financial goals for the short, medium, and long terms. For example, in the short term, the investor may want to buy a car; in the medium term, he might expect to pay for his childrenâ€™s education; and in the long run, he will need money to see him through his retirement.
The second step is to assess the current position in the financial life cycle. And the third step is to decide how much risk one is willing to take while investing. This is critical as different financial investments have different risk factors. These steps will ensure the investor has a good strategy to plan his/her investments.
Strategy number two is to understand risks and rewards thoroughly. Many investors make the mistake of underestimating risk and/or overestimating rewards from an investment. This aspect of investing requires great care. By realistically estimating the risks associated with each investment option, the investor can greatly improve his chances of building greater wealth.
The third strategy is to select appropriate investment options. Today, it is essential to invest in options like mutual funds. Though investment risk and economic uncertainties can never be eliminated, mutual funds, thanks to their mix of experience, research, analysis and flexibility can ensure success for investors in different segments. But it is necessary to invest in the right type of fund, whose objective matches the investorâ€™s.
The next strategy is to get the best out of tax-saving investments. Many of us have the habit of investing in a haphazard manner to save taxes. Thatâ€™s because we treat tax savings investment as a chore, rather than as a tool to save the most on taxes and to make our money grow. It makes good sense to integrate tax saving investment into overall investment program. That way, one can invest in a disciplined way rather than hastily at the end of the year. And not only an investor can invest in the options that are best for his goals but he will also achieve a goal of investing regularly.
An investor after determining his overall exposure to equities, he can invest a part of it in equity-linked savings schemes (ELSS) of mutual funds. Being equity oriented funds these have the potential to provide better returns than most other options that are eligible for tax saving under Section 80C of the Income Tax Act. Additionally, the returns they yield are also tax-efficient.
Another strategy is to watch the asset allocation at all times. It is quite common to see investors allowing their portfolios to ride a bull market â€“ the original balance of equity and debt goes flying out of the window in the quest to maximize returns. But equity requires a long term commitment, and it is equally important to maintain the proper asset allocation. In other words, re-balancing oneâ€™s portfolio, either up or down, is necessary for long term success. Portfolio rebalancing is the process of bringing the different asset classes back in proportion, following a significant move in one or more asset classes.
Remember, rebalancing is more about managing risks than maximizing returns. For an investor it is important to decide on a time interval once a year, perhaps to examine his portfolio. A tiny shift in asset allocation may be no cause for corrective action. But a shift greater than 5% is a signal to rebalance a portfolio. Such a shift could occur gradually over time, or following an abrupt rise or decline in one or more asset classes.
Lastly, the investor must not to lose sight of his long term objectives. People often focus on short term goals at the cost of long term goals. There may be times when it is necessary to do so, but it is always better to explore other possibilities rather than abandoning long term investment plans abruptly.