Investing towards one’s future financial needs requires considerable amount of effort and technical knowhow. One such is identifying one’s financial goals. Once they are identified, it then proceeds to determining person’s risk appetite and associated investment objectives. Such objectives are related to the ‘investment pyramid’ which includes-
Security of the investments i.e. the mode and the instrument of investment should be well regulated and safeguards the interest of the investor. It should also ensure liquidity of the investments as and when needed. Capital protection which would mean protecting against the erosion of amount invested due to market volatility. Capital Growth that talks about the returns on investments as per the expectation of the investor followed by Capital Multiplication which determines aggressive allocation of investment funds for higher returns.
Once the objectives are set right, then one may look into the investment period to determine the investment vehicle. At this point it is crucial to understand that the returns from investments may vary on the basis of the investment tenure as risk taken for long term investments is unlike risk taken for short term investment. So, here are the 4 important term periods for one to lock their investment-
1) Immediate Term – Less than or equal to 1 year
2) Short Term – More than one year but less than 3 years
3) Medium Term – More than 3 years but less than 8 years
4) Long Term– More than 8 years
Remember that these time-frames do determine market suitability, risk appetite, expected returns from investments etc.
• Immediate Term – Less than or equal to 1 year
For immediate terms, money market serves ideal as it ensures adequate liquidity and lower sensitivity to market risk than investing in equity instruments.
• Short Term – More than 1 but less than 3 years
In a short term investments, risk taken should be higher than in immediate terms. It should include a fair mix of short term debts, money markets income funds and equity investments to increase the opportunity of earning higher returns. Higher exposition to equity in short term investment is not advisable.
• Medium Term – More than 3 but less than 8 years
Higher moderate to higher amount of equity investments is advisable for midterm investment time horizon is suitable for the equity markets to provide returns while adjusting to market volatility. Besides equity market, debt type investments should also be considered to provide much needed stability to the investments.
• Long Term – More than 8 years
Long term investment tenure is suitable for higher equity exposure in the investments. In the long run, long term investments are avenues of higher returns as compared to the immediate, short or medium terms. And in order to solve the purpose of diversification, investing in equity is not enough; one should also consider debt investment to withstand market volatility.
The overall purpose of investing your hard earned money does not end by only deploying it towards an investment avenue. It requires a proper assessment of individual needs and appetite to bear the tough market situation. One also has to understand the return potential in the investments as the expectation should not be over exaggerated while initiating investments processes.
