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Investment Planning | |||||
Plan your Investment Make your money work for you
Investors with excess funds invest and earn a return to enhance their welfare.
Every one seeks to invest wisely to derive maximum benefits out of their
funds. Our investment decisions today do affect our future wealth. Hence it
is worthwhile to take some time to put together an investment plan, to
make your money work for you. An informed investor, with a balanced approach,
can choose his own long range investment plan.
An overview of information and facts are presented here to make you an informed investor.
Make your money work for you:
People do have the goals of buying a home, go for vacations, educate
their children, plan weddings in the family and eventually enjoy a peaceful
retired life. Saving and investment planning habits can help you do all
of that. If you have saved money, you have to make it work for you. Identify
your specific goals/requirements in life, set priorities and plan your
investments so as to start on the right path. The purpose of investments
is to earn the highest returns, with all the associated risks.
How to go about planning
You must always set up an emergency fund and then divide your additional resources among various investments. You
may choose stocks, bonds, real estate or mutual funds. At this stage,
it is better to assess the situation in your life and decide suitable
options. You must assess the following before planning your investments.
1) What are your goals in life
2) How much of risk can you take in investing
3) What is the period within which you wish to achieve your goal (Like if you intend to buy a home or plan higher education for your children, what is the time limit available to you to achieve these goals )
The following are some of the major investment vehicles:
a) Set up and maintain emergency funds.
b) Stove your saved funds in Savings accounts.
c) Invest in Money market investments.
d) Look for tax-exempt investments and retirement accounts.
e) Obtain Certificate of Deposits.
f) Invest in stocks and bonds.
g) Look for real estate options.
h) Take the mutual fund route.
a) Setting up Emergency funds:
Your first goal must be to set up an emergency fund for use during tough times of life. Once an emergency fund is set up, you must invest to secure your future. You can always create a set of rules about when to use the emergency fund. It is better to keep the fund separately, as a cash equivalent, such as savings account, bank deposit funds, mutual funds or short term funds.
b) Savings accounts:
Savings account offers low rate of interest. However many people prefer to retain some money readily accessible. However Certificate of Deposits (CDs) and money market funds pay more interest than savings accounts.
c) Money Market Funds:
Many short term funds (such as CDs, Treasury Bills, government securities and commercial paper) are available through mutual funds. The funds preserve your capital, provide liquidity of funds and generate income. They generate continuous income with little or no risk even when the market is down. These funds can be used to park your money in between investments. Interest rates fluctuate based on market conditions.
d) Tax-exempt money market funds:
Investments in these funds provide relief when you are in a high-tax bracket.
e) Certificates of Deposits:
CDs are fixed rate investments made with the banks for a specific period. You can choose to deposit when the interest rates are at a peak. If you are choosing CDs as emergency funds, it is better to choose a short term.
f) Stocks and bonds:
A share of stock is worth whatever anybody is willing to pay to acquire it in the open market. Stock prices fluctuate based on the earnings of the company, industry s future, the country s economy and interest rates. If you choose to enter the market, start reading about the stocks and the way the market operates. Read the news papers for stock quotes and how a stock moves and watch how the experts select stocks.
Bonds are favored by conservative investors to earn sufficient/safe income. Generally returns on bonds are lesser than those of stocks.
g) Real Estate:
Apart from investment in homes, other options are commercial and industrial properties and land. But the investment is not liquid and you need to exercise a lot of care and caution before investing in real estate.
h) Mutual funds:
A mutual fund is the investment company that sells shares to raise money
and makes investments. Investors pool their money and rely on the expertise
of professionals to manage their money. They are the easy and inexpensive
investment planning means of diversification.
Funds are liquid as shares are redeemed on demand.
Investment decision
This decision involves the following processes:
a) Asset allocation
b) Security selection
c) Identification of personal risk tolerance
d) Diversification of funds.
Asset allocation/Security selection:
The first part of investment decision is to valuate and analyze individual
securities. This is a time consuming job. It is necessary to understand
the characteristics of various securities as outlined by us before. Value
these securities to estimate their price or value. Value is the expected
future returns and the risk attached. For bonds, valuation is easy because
returns are known and risk can be approximated. Valuation of stocks is
difficult. The major part of investment plan (after evaluation of securities)
is selection of securities. It is essential to choose the right type of
investments, decide how much to invest, how often to invest and then keep
track of how well your investment is earning for you. Asset allocation
is the most important decision by an investor. This accounts for more
than 90% of the variance in returns. You must determine which of the investment
planning vehicles is suitable for your goal. Then you have to allocate
the available funds to each category.
Risk tolerance:
Risk is the possibility of your investment either earning or losing money. Generally, you must take more risk to earn higher returns. Every one cannot tolerate or face risk equally. Your age, financial stability, goals in life and life style can indicate your level of risk tolerance. Locking of your money in uncertain investments may also make you nervous. If the longer period is available to achieve your goal (like buying a home, marriage in the family), you can take more risk in investing your money.
Diversification of funds:
You can reduce your risk by diversifying your funds among various types of
investments. The way you allot your funds will decide the success of your
investment plan. Real estate values increase in the same direction as
inflation. But a bond behaves the other way. Mixing up of real estate
and bonds in your investments may reduce your risk of losing too much
money though your income may turn out to be moderate. The major reason
for diversification and basic principle of asset allocation is to avoid
placing all your eggs in one basket . This principle in effect brings
down the risk factor involved in investments. The extent of your diversification
will depend on your goals, risk tolerance level and the rate of inflation
at the time of your investment. Further, if your portfolio of money is
small, you may not be able to diversify into many options. In this case,
it is better to investment planning
in mutual funds which are diversified.
Review the investment portfolio to maintain balance:
It is always advisable to recalculate your investments every year end and redraw your investment plan if any investment is not performing up to your requirement or does not meet your goal.
Identify your goals in life, plan wisely, allocate funds intelligently and
invest cautiously. This is the bottom line of investment plan.
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