Investment Planning: Four steps to nailing an ideal investment goal

December 15, 2020 1:15 AM

Spending some time to note down your investment goals will help you in charting out your long-term roadmap to financial success

This means that this goal is not rational and achievable. So, in such a case lower your expectations or increase the amount of money set aside each year.This means that this goal is not rational and achievable. So, in such a case lower your expectations or increase the amount of money set aside each year.

By P Saravanan & Manas Mayur

The recent surge in demat accounts is clear evidence that the Indian equity market has been attracting a large number of new investors. The current generation of investors, compared to one or two decades ago, have better access to information. Access to such a tsunami of information is also a source of confusion for the new investors. Therefore, it is essential to have a well-defined investment goal before investing.

Clearly measurable
It is essential to set your investment goal in such a manner that it can be measured periodically. For instance, keep a goal such as setting aside Rs 5,000 every month towards investment in equity shares rather than keeping a goal that I will invest some amount every month in equity shares. Keeping a clear, definite and simple goal helps you to check at the end of a period whether you have achieved the same or not.

Clear-cut investment horizon
One of the essential elements of investment goal is to have a clearly defined investment horizon or investment holding period. Greed and impatience drive investors towards short-term losses. What investors need to understand is the power of compounding. Investors must understand that the effect of compounding even moderate returns over many years are compelling. Let us consider BSE Sensex with base value of 100 in 1979 and it generated 100 times returns over a period of 32 years. As of December 2020, the Sensex stood at 45000 levels. It was at 450 levels in 1988, i.e., 100 times in 32 years with a CAGR of 15.48%. Therefore, it is very important for investors to keep their investment time frame in such a manner that their portfolio is benefited by the power of compounding.

Goals should be rational & doable
Investment goals should basically be achievable. If you plan to reach Rs 1-crore corpus by the age of 50, start your investment at the age of 24. Look at the historical rate of returns in different asset classes, expected probable reasonable returns, associated risks, etc., and set aside an appropriate amount across asset classes. For instance, it is impossible to achieve Rs 1 crore corpus by setting aside Rs 10,000 every year. This means that this goal is not rational and achievable. So, in such a case lower your expectations or increase the amount of money set aside each year.

Consider different asset classes
Though equity shares are providing a good rate of return, investors should also consider other asset classes as a part of their portfolio as a part of their investment goal. For instance, real estate is an asset class which was around long before the equity markets came into existence. According to individual investors’ risk appetite, one should consider different asset classes as part of one’s portfolio. Investment goals should also consider the possible asset classes without any bias towards any asset class.

To conclude, investors should remember that the future is uncertain. Sometimes nothing happens for a decade and sometimes a decade happens in a few days. So, spending some time to jot down your investment goals will move you along the path to build your long-term roadmap to financial success.

P Saravanan is professor, IIM Tiruchirappalli and Manas Mayur is associate professor, Goa Institute of Management

goal-setting
First step in any investmnet planning is to have a well-defined investment goal

A clear and simple goal helps you check how close you are to it at the end of a period

Set your investment goal in such a manner so that it can be measured periodically

A clearly defined investment horizon is essential

Goal should be realistic and aligned with rate of returns in different asset classes,

Investment goals should consider all possible asset classes without any bias

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