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Deciding to start investing towards your goals is the first of many steps you need to take on your investment journey. What comes next, is building a robust investment portfolio that supports your financial objectives.

Wondering where to start from? We’ve got you covered. Mentioned ahead are the important factors that you need to consider before you begin constructing your ideal portfolio. Read on!

Your Life and Investment Goals

This is the starting point for assembling your portfolio; the step that you need to pay attention to the most.

This follows a series of important questions you need to ask yourself ; “Why am I investing?”, “What is the purpose of this investment?”Your goals could be anything: marriage, education, planning a family, children’s education, buying a car, a house, to save taxes or simply to create a corpus.

Once you have a clear understanding of the whats and the whys, the next step is to set a time horizon to these goals. 

For example, you know you want to start your higher education in two years then that becomes a short term goal, if you have children and you know you need to plan for their early and higher education in the next 10 years, then that becomes a medium to long term goal.

Retirement is one of the most important and most planned goals for everyone and that is certainly a long term goal. Tax saving will be a near term goal.

After you know what your goals are, then you can put a number to them. Say, you need Rs 1.5 lakh to exhaust your 80 (C) investments for tax saving purposes, Rs 50 lakhs for a college abroad for your higher education or Rs 1 crore for your retirement life.

These numbers can vary depending on your lifestyle. For ease, you can consider clubbing all your short term goals together and long term goals together and invest accordingly. 

Risk Appetite 

The next factor you need to consider is your risk tolerance. Risk appetite in simple terms means how much can you invest and how much can you stand to lose and not get affected financially and mentallly when the markets are volatile.

Do you want to play it safe and earn a fixed rate satisfied by your need? Do you have the mental strength and financial viability to play it risky, lose money at times and come back stronger to stay invested?

Namely there are three versions of risk appetite: either you are a risk taker, you completely avoid risks or you find yourself somewhere in the middle of both extremes.

This is a tricky area to navigate and would require you to consider several factors such as liquidity requirements, nature of your income, the number of dependents you have etc to arrive at the conclusion, of where you fall on the risk spectrum.

Say you fall into the higher risk category . You may be starting young, have sufficient capital that you don’t need immediately and little financial responsibilities. Your long term aim might be accelerated wealth creation.

In such a scenario, you can consider looking at high risk- high reward avenues such as stocks or equity mutual funds that give inflation beating returns in the long run.

Of course they are subject to market risks and initially you may see your portfolio in red more than you want to, but this is a trade-off that you should be willing to accept. 

If you think you want to avoid risks and play it safe always, you would want your capital to be safe for the entire investment tenure or at least for most of it.

In that case, you can consider investing  more in fixed deposits, recurring deposits and other banking products and you can focus on debt instruments as well. With safety comes moderate returns so their returns will not spike as much as equities but will be guaranteed to a great extent. 

Debt mutual funds or investing in government bonds and securities directly are considered safer than equities and equity mutual funds because they carry a guaranteed rate of return and are government-backed.

In fact, with banking products as well the notion of it being a banking product and having a stalwart like the Reserve Bank of India supervising the same bodes well for many traditional investors. 

While this exercise may seem hectic , knowing your own profile and assessing your risk will ensure you have your expectations right from the investment products you are venturing into. Not assessing your risk may lead to mis-approporiation of your own funds and expectations will see a downside. Let me explain how. 

Let’s understand this through an example of a person with low income and low risk appetite. 

Salary of the person: Rs 30,000

Investable corpus: Rs 5,000

Balance: Rs 25,000

Risk appetite: Low

Assuming the person invested their money in an equity index fund benchmarked to Sensex

Sensex is down at least 25% as on April 16 on a year to date basis. This would mean that you would lose at least Rs 1,250 of your money in case you choose to redeem your investment today. 

In this situation, how has investing just in equities with a low risk appetite harmed you?

You are left with only Rs 3,750 from your invested corpus. Say you had an emergency situation and you required at least Rs 5,500 at the end of six months from your investment. 

Let’s highlight at least two problems with this investment.

No diversification : Diversification essentially means spreading your investments across different investment avenues and covering different sectors and industries so as to make the best out of all cyclic phases the stock market runs through.

Here, you invested all your money in Sensex and the index has fallen during your required tenure. You could not take the benefit of any other investment that may have taken off well during the same period. 

For example, Gold has risen at least 10-12% in dollar terms during the same time period. 

Had you diversified your investment between equities, gold and other investment options as well, you would have been able to take the best of all products.  

This is not a recommendation to invest in gold over equities. It is just an example to explain how diversification comes in handy. You can redeem the money invested in a product that has done well for an emergency situation and let others remain invested.

Diversification helps you to take advantage of an investment that may be doing better than the others in such a scenario. If you put all your eggs in one basket, any amount of pressure will break all the eggs.

Low risk : You had a lower risk appetite because of your income level and you invested all that you could in a high risk product. Equities are volatile products and there is no guarantee it will give you returns in a short period of time.

You have incurred a loss on your investment and you will have to curb your other expenses and use some money from your balance amount, which is Rs 25,000 to fund your emergency.

Does this mean equities are to be avoided? Definitely no. What you can do is, study your risk profile and goals and properly divide your money across different products which can or cannot include equities, depending on your risk profile.

Match Your Risks and Goals

 You have your goals in place, you know how much risk you are willing to stomach, so the next step is to align your risk with your goal. Let’s take an example, suppose you want to achieve a set corpus for your child’s higher education in say 15 years.

If you invest in a high risk-high reward investment option say equities, you may be able to accumulate the required corpus by investing a lesser monthly amount as high returns are expected.

On the other hand if you are a conservative investor who does not want to bear the brunt of volatility in the short term and want assured returns, then you can look at options like PPF or fixed deposits.

If you choose the latter, you may have to invest a larger amount monthly since the returns are lesser, to reach the same corpus within the time frame. You can also take a mixed approach and apportion your funds judiciously between both the investments if you want to get the best out of both.

Either way, make sure your capital allocation is also aligned with your profile. 

The Final Word, 

Self awareness goes a long way in becoming a successful investor.  Before you actually jump in, it is desired that you must have a basic understanding of the market and its ways.

Read about investments, different products available in the market, understand your country’s economy and all factors that impact your wallet.

There is no one size fits all for investment strategy. Take the time out to understand yourself as an investor and then proceed . 

Happy Investing! 

Disclaimer : This blog has been written by the Content Desk at Sundaram Mutual Fund. The views expressed in this post are that of the author and not those of Groww. Mutual funds are subject to market risks. Read all scheme related documents carefully before investing.

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