Protect & Grow Your Wealth
Life is all about striking a balance. When you are in school you try to strike a balance between your academic and sports activities. When you get to college, you do a balancing act between having fun and preparing for various competitive exams. Once you join the workforce and start a family, you struggle to strike a work life and family life balance. The fact of the matter is that life is one big tightrope walk. However, take a step back and look at your investment portfolio. When it comes to creating an investment portfolio, most of us focus on portfolio growth.
Our main aim is to generate sufficient returns so that we can achieve our short-term and long-term financial goals. Due to this blinkered approach, many of us miss out on an important element of portfolio management i.e. wealth preservation. When you are creating your investment portfolio you must give as much importance to wealth preservation as you are giving to growth. This means striking a balance between safety and growth. The good thing is that by following a few simple steps in a disciplined manner, you can easily achieve this balance.
Find the Reason
The first and foremost question that you must answer is ‘why are you investing?’ It could be for financial stability or it could be to achieve a host of financial goals or it could even be to simply create a nest egg for your retirement. The best part is that it could also be all of the above. Once you know ‘why’ you are saving and investing, it will become easier to create a roadmap for achieving your goals.
Create Smart Goals
Once you know ‘why’, the next step is to clearly identify each of your goals. A good way to achieve this is to set SMART goals, i.e. goals that are Simple, Measurable, Achievable, Relevant and Time-Bound. For example, let’s say that one of your goals is to purchase a house. But, can you create a sizeable corpus simply by starting your investment journey? Let’s try and convert your goal into a SMART goal.
S: I want to buy a house in city suburbs.
M: I need to accumulate a corpus of Rs 1 crore to make a down payment for my dream home.
A: My monthly income is Rs 1,50,000 and I can invest Rs 50,000 every month. Accordingly, I cannot invest more than Rs 50 lakhs over the next seven years.
R: I want to reduce my monthly rental and have the security of owning a home.
T: I want to purchase my dream home in the next 7-10 years.
Understand the Element of Risk: As you know, there is no such thing as a free lunch. Risk is almost ubiquitous and you must make an effort to understand your own risk profile as well as the risk inherent in different types of investment. Your risk profile is determined by your willingness and ability to take risk. The risk in an investment is measured by its volatility. The more volatile an investment is in terms of its price movement, the riskier it is considered. From an investment perspective, fixed income instruments fall at the lower end of the risk spectrum while equity instruments fall at the higher end of the risk spectrum. When creating a portfolio, you must ensure that your risk profile is well-aligned with the overall risk of your investment portfolio.
Invest as per your Asset Allocation Strategy: It is well-known that a well-diversified investment portfolio can help you minimise the overall risk of your portfolio while maximising investment returns. This means that you must create a customised asset allocation strategy that takes into consideration your return requirements, risk profile and investment time horizon and then spreads your portfolio investments across multiple asset classes. By doing this you will ensure both wealth preservation as well as growth. Diversification will help to mitigate risk, thereby allowing for wealth preservation while investing in risk assets like equities in proportions that are aligned with your risk profile. This will enable the growth of your capital.
The writer is Managing Director, Future First Financials Pvt. Ltd.
Email: praveen@futurefirst.co.in
Website: www.futurefirst.co.in
