BASICS OF INVESTMENT PLANNING
Keeping in mind the investor’s risk tolerance, financial goals, and time horizon, investment planning focuses on identifying effective investment strategies to successfully accomplish their financial goals. A wide variety of investment instruments are available today including shares, bonds, mutual funds, bank deposits, real estate etc. Through strategic investment planning, an investor can identify the most appropriate investment portfolio mix.
The Difference Between Saving & Investing
Saving is putting your money aside or putting it into cash products like a saving bank account, little by little. You usually save up to pay for something specific, like an international holiday tour, buying a dream home, or creating a fund for any emergency.
On contrary, investing means taking some of your money and investing it in assets that will help you grow your wealth over a period of time. For instance, investing in equity, property, or mutual funds.
How Investment Planning Works
Before you begin with investment planning you have take into account your current and expected income level and your risk tolerance. You then need to lay down your financial goals. The important aspects of investment planning are:
Define Your Purpose – Capital Growth Or Regular Income?
Capital growth is the increase in the value of your investment portfolio over time.
Investors who aim to invest for long-term, often leverage on capital growth. A long-term investment will allow you to smoothly tide over hard times without much changing your investment strategies. Best options for capital growth are stocks, mutual funds, and real estate.
On the contrary, if you are planning to invest in a short-term goal or if your purpose of the investment is the regular flow of funds in order to complement your present salary, then you should opt for income investments. It engenders a regular flow of income by the mean of dividends and interest. Income Investments include fixed-income investments like bonds and certificates of deposit.
Determine Your Risk Tolerance
Every investment asset includes a unique risk-return exchange. Usually, it is believed that riskier the investment asset, the higher the returns. This makes it worthwhile for investors to take on the risk. However, before you fall for the statement, please understand that risk means calculated risk. Before you start with investment planning it is crucial to understand your risk tolerance, which highly depends on your current income, savings, cost of use to lifestyle and responsibilities.
Understand What Kind Of Investor You Are?
You can easily determine your type by understanding your risk tolerance. Mainly there are four types of investors:
These investors have low-risk tolerance. Their portfolios mainly consist of 70% of income assets.
These investors have an average risk tolerance. Their portfolios strike a balance of growth and income assets.
These investors have high-risk tolerance. Their portfolio mainly consists of up to 80% of growth investments.
These investors have very high-risk tolerance. Their portfolio comprises more than 90% of the funds in speculative investment assets.
Irrespective of what type of investor you are, the best way to maximize your returns while minimizing the risk is to frequently review your investment portfolio.
Benefits of Investment Planning
Investment planning helps you to –
- Generate income and/or capital gains
- Multiply your wealth
- Build a strong investment portfolio
- Save on taxes