Getting started with Investment Planning

Investing can be a daunting topic for beginners, but it doesn't have to be. This guide will provide you with the basics of investment planning, helping you navigate the world of finance and secure your financial future.

Need for Investment Planning

Why Invest? Inflation is the silent thief that erodes the purchasing power of your money over time. You may already know this, but here’s a story if you don’t.

Do you have ₹10 lakh? I really need it. Can you lend it to me? But there is one condition: I will return ₹7.12 lakh, and that too after five years!

A foolish would agree to that, right?

Let me tell you, your ₹10 lakh is worth only ₹7.12 lakh after five years, ₹5 lakh after ten years and ₹3.6 lakh after 15 years. All thanks to Inflation! (assumed at 7% p.a.)

So, it’s a no-brainer that if you let your money sit ideal, it will eat its value over time!

Investing helps you beat inflation and grow your wealth over time. Planning for your future investment planning is a roadmap to achieve your financial goals, whether it's a short-term need like a vacation or a long-term goal like retirement.

Steps Involved in Investment Planning

Investment planning is a process that involves setting financial goals, determining the appropriate level of risk, exploring different investment options, and making a personalised investment strategy. 

The first step in a good investment plan is to define your financial goals, both long-term as well as short-term.

This helps determine your investment time horizon and risk tolerance. Your investment time horizon is the period for which you want to invest your money, and it can range from short-term to long-term. Risk tolerance, on the other hand, refers to your ability to withstand potential losses in your investments. It is important to understand your risk tolerance as it determines the type of investments you should make.

The next step is to explore different investment options.

Where to invest?

There are many investment opportunities for long-term investment plans and some of the best short-term investment plans.

Broadly, investments can be classified into financial or non-financial investments. Non-financial investments include real estate, gold, commodities, etc.

The different avenues of investment are;

• invest, real estate, commodities, diversification, how to invest, investment planning, equity investments, fixed income, where to invest, structured products (these products are customised investments and provide investors with risk-adjusted exposure to traditional investments or assets)

Stocks, bonds, mutual funds, and real estate are some of the most popular investment vehicles. Stocks offer the potential for capital appreciation and dividend income, but they also carry the risk of price fluctuations.

Bonds provide regular interest payments and a return of your principal upon maturity, but they generally have lower growth potential than stocks. Mutual funds offer diversification across various assets like stocks, bonds, and commodities and cater to different risk profiles and investment goals.

Real estate provides rental income and potential for appreciation in value, but it requires significant upfront capital and carries inherent risks like market fluctuations and vacancy periods.

Diversification

Once you have explored different investment options, the next step is to craft your investment strategy. 

Diversification is key to mitigating risk. Asset allocation involves dividing your investment portfolio among various asset classes based on your risk tolerance and goals.

For example, a young investor with a long-term horizon might have a higher allocation to stocks for their growth potential, while an investor nearing retirement might prioritise bonds/debt instruments for income and stability.

It is important to note that investment planning is a continuous process that requires regular review and tracking. Market conditions and your personal circumstances can change, so it is essential to regularly review your investment portfolio and adjust your strategy as needed. 

How to invest?

Investors can invest directly in any of the investment opportunities mentioned earlier, or they can invest through an intermediary that provides various managed portfolio solutions.

Direct investments involve purchasing securities issued by companies and government bodies or commodities like gold and silver. Gold or silver can be bought directly from sellers or dealers or even from online platforms. For financial securities, investors can seek the help of fee-based financial intermediaries like brokers, depositories, and advisors to buy or sell investments for a commission or fees.

Investors can also invest indirectly by pooling their money with other investors through an investment vehicle. These vehicles are professionally managed and invest in a variety of securities and other investments on behalf of the investors. This allows investors to access professional expertise and lower costs.

The following are some of the managed portfolio services available to investors in India:

• Mutual Funds (MFs)
• Investment Advisory (RIAs)
• Alternative Investment Funds (AIFs)
• Portfolio Managers (PMs)

Conclusion

Investment planning is an essential step towards securing your financial future and beating inflation. By understanding your financial goals, risk tolerance, and investment options, you can create a personalised investment strategy that meets your needs. It is important to regularly review and adjust your investment portfolio as needed to ensure you stay on track to achieve your financial goals. Whether you choose to invest directly or through a managed portfolio solution, taking the time to invest in your financial future is a smart decision.