I am 32 years old and have been investing since 2007. However, I am not sure if my investments through systematic investment plans (SIPs) and in stocks are sound as they are not goal-specific. What should I keep in mind while investing?
The good thing is that you started saving early. However, there are a few basic steps you need to follow for better portfolio management.
You need to define your financial needs. You can classify them in three categories. First, “trust needs” that are critical. Examples can be child’s education, buying your first house and planning for retirement. “Reserve needs” is second and can be defined as contingency or emergency, such as medical emergency. The third and the last category is “luxury needs”. As the name suggests, all expenses that are important but not critical and are lifestyle needs fall under this category. Examples can be buying a car, foreign travel or a second house.
Once these needs are defined, your investments through the SIP route can be bunched under them.
However, before you choose the asset class for a particular goal, you need to define the criteria on the basis of which it will be selected. This selection of investments is to be based on three parameters: return, safety and liquidity. Each financial goal needs to be ranked on the basis of these parameters. Let’s take an example. If you plan to go for a foreign holiday after two years, it is a luxury need and the order of preference for the parameters would be returns followed by liquidity and safety. Equity is the asset class that will fit here. But what happens if the equity market goes through a bear phase and your corpus gets eroded? May be you will not take the foreign holiday or postpone it or settle for a domestic holiday. However, the reverse could also be true; you may plan a domestic holiday but the returns could fund you a foreign holiday.
Had the financial need been your child’s education, the selection process would have changed with returns taking the back seat and safety becoming sacrosanct. The purpose of liquidity is to determine the tenor of the investments.
Another aspect that you need to follow over and above the selection is to evaluate the performance of an asset class. You need to be careful about the fund/stock selection and how they are performing compared with the benchmark/peer group. Continued underperformance over two-three quarters or more should make you revisit the investment.
Surya Bhatia, certified financial planner and principal consultant, Asset Managers
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