BackLonger the horizon, higher can be the risk that you can take
For these, you could consider mutual funds having equity exposure
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I have between 25 lakh and 35 lakh of surplus funds, which are currently parked in fixed deposits and savings accounts. How should I invest this amount? Are there any stocks that you could recommend?
—Vikram
Before deciding where to invest, you should follow some basic principles of financial planning. Understand your cash flows—it is not only about this one-time corpus which is to be invested. You need to answer few questions: How was it created? Did you receive a bonus or is it a gift? Or whether the funds were accumulated over a period of time?
The purpose of this exercise is to ensure there are no surplus funds just lying in your bank account over a long period of time, because then this money is not being correctly utilized. You need to put the money to good use and it should be invested to help you earn income as well as wealth. In case you have a regular income, then you also need to start investing on a regular basis, preferably monthly.
Once you know your cash flows, and more importantly how much you can save, understand your financial goals and targets.
Goals can be buying a house, planning for your own marriage or if married with kids then their education, their marriage and you own retirement. These are broad indicators on what the various goals can be. It may be different for you. The key is to identify and quantify them. Also, assign the tenor/horizon when these goals will come up.
Lastly, you need to assess your risk profile—risk appetite and risk capacity. There are many websites that carry these risk awareness tests which help you to understand your risk tolerance. This eventually helps in deciding whether you can take risk in your investments and to what extent. Once this is done, you are better prepared to decide your asset mix.
Subject to your risk tolerance, any investment that is done for a short-term goal needs to be invested in a safe asset class, such as fixed deposits, ultra short-term or liquid mutual funds.
Where you do have a long-term horizon, you can consider taking risk. For these, you could consider mutual funds having equity exposure—MIP (monthly income plans), where equity exposure is restricted to 10-30%; Hybrid funds, where equity exposure is more than 65%; large-cap funds; multi-cap funds; and mid-cap funds. Longer the horizon, higher can be the risk, as the money can remain invested for a longer term.
Direct stocks can also be considered. However, this is an asset class where as an investor you should have the required knowledge, and should understand the risks associated with direct stocks.
Queries and views at mintmoney@livemint.com
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