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Business News/ Money / Calculators/  Plan investments based on returns, liquidity and safety
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Plan investments based on returns, liquidity and safety

This, along with risk profile, risk appetite and risk capacity will determine your investment basket

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I am 26 years old and earn 7.76 lakh a year. I am married and I have a two-year-old daughter. I am looking at different investment options to plan for goals such as my daughter’s education, her marriage, buying a home and car, and pension after retirement. What kind of instruments should I invest in to have the right amount of diversification?

—Srikrishna Ajjarapu

It is good to plan for your future, and the earlier you create the focus the better. Starting early helps in building corpus and with the benefit of power of compounding, the corpus grows at a steady pace. By deciding the broad financial goals you can create various investment baskets and the investments can be planned accordingly. The investment plan can be based on three broad parameters in order of preference—returns, liquidity and safety. This, along with risk profile, risk appetite and risk capacity will determine your investment basket.

Let us consider your daughter’s education. It is a long-term goal as it will be due after 15 or 16 years. So, you don’t need liquidity and this parameter is assigned the least priority; returns being assigned medium priority, and safety the highest. The asset mix is to be created accordingly.

But this does not mean that due to the need for high safety you cannot consider equity as an asset class. However, it has to be considered subject to the goal being long-term and your risk profile.

You can do the same for other investment goals, i.e., daughter’s marriage, your retirement, and buying a house. These goals follow the same investment pattern as above.

However, marriage and retirement are really long-term goals. Such goals make a strong case for investing in equity as equities held for long tend to deliver returns that are higher than inflation. Here you should consider investing in mutual funds, and since you have regular income, go for systematic investment plan (SIP) as the mode of investment. Bring diversification within the equity portfolio to reduce asset volatility and a mix of large-cap, multi-cap and mid-cap can be considered.

The goal of buying a house will depend on when you plan to buy it—in the short term or long term.

You can also consider long-term securities to provide stability to the portfolio. Public Provident Fund and long-term bonds are good options.

After the strategy has been decided for these goals, turn your attention to other goals such as buying a car. This is a short-term goal, but being a luxury need, the returns parameter can be assigned the highest priority with liquidity being a medium priority, and safety the lowest. The rationale being that in case the risk taken does not pay off, you can always delay the goal. The same plan can be used for other needs as well. This also holds true if you are buying a second house, as that will be more for an investment purpose.

Queries and views at mintmoney@livemint.com

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Published: 22 Jun 2015, 08:23 PM IST
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