Imagine that you and your friends have decided to go on a road trip from one end of the country to another. One option is to just wing it. Get into the car and see what happens next. Nine out of 10 times, this ends up in a disaster (the only time it is successful is in movies). On the other hand, you could plan the trip well in advance and have a blast! Get a map, ensure there is plenty of food and water, have a spare tyre in case the car breaks down. And music, don’t forget to have good music.
Similarly, investing money can be seen as a lifelong journey. And to do it successfully, you need to have a good investment plan.
In this article, let’s find out how you can make an investment plan so that you can earn good returns over the years.
Anatomy of an investment plan:
1) Establish your financial goals
What are the different financial goals you wish to achieve in the coming years? Write down all of your goals on a list of paper.
Sam, a 25 year old engineer has the following goals:
Everyone has different investment goals. And the first step to achieve these goals is to identify them and outline them as clearly as possible.
2) Analyse the different investment options
The great thing about investing is that there are lots of options to choose from. A lot of investors think that it is enough if you identify a good investment option and put your money in it. That’s the wrong approach. Your investment strategy should be goal-based. This way, you can find the right avenues to invest your money.
For example, to create an emergency savings fund, investments in fixed deposits or short-term debt funds is a good option. For a long-term investment goal like retirement, investment in equity funds is more suitable because it has the potential to provide high returns.
3) Risk and return: Ensure there is a balance
When it comes to investments, there is always a degree of risk. Whether it is a savings bank account or the stock market, you cannot avoid risk. However, the degree of risk varies from one investment option to another. It is commonly said: higher the returns, higher the risk.
So, it is very important to choose an investment option that matches your risk tolerance level and also helps you achieve your goals. For example, you may not want to invest in stocks because of the high risk involved. But that doesn’t mean you cannot invest in equities at all. Through mutual funds (balanced funds, index funds), you can invest in equities and minimize your risk.
Everyone knows the saying: don’t put all your eggs in one basket. But when it comes to investing, it is important to put this saying into practice. Putting all your investments in a single option is dangerous. For example, imagine you put your entire investment amount in equities. The market may be performing exceedingly well. But if the market crashes all of a sudden, you could lose your entire money. Try to split your investments into different avenues such as stocks, bonds and savings accounts. Another way to diversify is to invest in index funds.
5) Evaluate your progress
Remember that road trip you plan to take with your friends. Once you reach a certain stage, you may want to whip out the map (or Google maps on your phone) and see your progress. Are you on track or did your friend take a wrong turn and you are nowhere near your destination?
Similarly, you need to check your investments once in a while to ensure they are performing as per your plan. As you grow older, your goals may change. At such times, you need to incorporate your new goals into your investment plan and create a strategy to achieve these new goals. This way, you can ensure that your investments are working for you in the right way.
A plan helps you put your goals into a tangible and actionable form. By creating an investment plan, you can clearly see how much you have progressed year after year. So the first step of investing is to create a plan. And the important part is to stick to it, unless there is no other option but to change it (refer point 5).
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.