While it is a common knowledge that investments are necessary to compound wealth and make money work for you, it is equally true that its pattern differs across individuals.
While it is a common knowledge that investments are necessary to compound wealth and make money work for you, it is equally true that its pattern differs across individuals. To put it otherwise, it doesn’t follow a one-size-fits-all approach. Have you ever wondered why it’s so?
The objective of this piece is to find its answer and understand why and how investment choices vary across individuals. Let’s get started.
Cashflow is different for each one of us and hence the investable surplus is variable. It’s the amount remaining after meeting all the expenses. While you may have an investable surplus of Rs 5,000, it might be higher or lower for your friend.
Even if it’s the same, liabilities may differ and this impacts investment. Also, a higher investable surplus doesn’t always necessarily translate into actual investment. There are many who are comfortable with their money lying idle in a savings account, earning a nominal interest rate of just a little over 3%.
Different risk appetite
Just like cashflow, risk appetite is different for each of us. Risk appetite is the ability to take or stomach risk. While you may be comfortable with volatility, the bug bear of equity investment, the mere feeling of losing money due to market swings may make someone else jittery and restless.
This has a profound impact on investment behaviour. The varying degree of risk appetite dictates choices of investment tool and the invested amount. For instance, you can leverage your higher risk appetite to invest in equities via stocks or mutual funds. On the other hand, a lower risk appetite may lead to sticking to traditional fixed-return instruments such as bank fixed deposits, PPF and NSC, amongst others.
Non-identical investment horizon
Investment horizon refers to the time until which you remain invested. For short-term life goals such as going on a vacation, the horizon could be 1-2 years.
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On the other hand, for medium-term goals such as buying a car or house, it can range anywhere between 4-5 years. For long-term goals such as higher education of children, their marriage and your retirement, it can range from 15 to 20 years or even more. This time-frame too can vary depending on individual choices.
While you may choose to plan your retirement from the moment you start earning, your friend might prefer deferring it by a few years. However, an early start has its perks and gives your money more chance to grow and gain from the power of compounding, which helps in creating a sizeable corpus.
Changing needs at different life stages
Our needs change with time and so do investments. At the beginning of your career, primary needs may encompass buying the latest smartphone or dining out with friends every weekend. For these needs, investing regularly through recurring deposits can help.
On the other hand, post-marriage, securing the future of dependents becomes a priority along with building a corpus for children’s education. To satiate these requirements, systematic investment plan (SIP) in mutual funds can be an ideal choice. Similarly, upon retirement it’s advisable to reduce equity exposure and move towards debt.
As evident, investments don’t follow a linear approach and change as per individual needs and situations. However, what’s important is to align them with life goals and review them at periodic intervals to make sure you are on the right track.
Upon reviewing, if you feel there’s a need for a change in asset allocation, do so. However, make sure your decision isn’t based on emotions as it can affect essential life goals. Equally important is not to follow the herd mentality that can lead to chasing products on their short-term performance.
(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)