Investment Planning
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To achieve future goals you need to channelise your existing resources and make
fresh investments, if needed, so as to accumulate a higher value that may be
used to accomplished the goal.
Where should you invest to get maximum returns? Should you invest in debt or
equity? If equity, then should you buy equity shares or invest through mutual
funds? If debt, then should you invest in bank fix deposit(FD) or invest in post
office scheme? Whatever your choices, the idea is to earn a return by making an
investment to achieve your long-term goals.
Factors Effecting Long Term Goals
When it comes to long-term goals, there are certain factors that need to be kept
in mind, such as: Effect of Inflation a persistent increase in the level of
consumer prices resulting in the loss of purchasing power of money is called
inflation. It is reflected, in percentage term, as a change in the whole sale
price index. What this means is that a Rupee today is worth more than a rupee
tomorrow. Take your own case as example. Compare the amount you spent on
groceries 10 years back and what you spend today. You will find that that prices
you are paying today for the various items, have risen sharply over the period.
Inflation is a silent killer of the purchasing power of money.
Impact Of Interest Rate Movements.
Due to market forces and activity on part of the Reserve Bank of India, interest
rates keep fluctuating. Whichever way the interest rates move, up or down, they
have a definite impact on your investments is fixed income securities.
Risk Tolerance
Risk tolerance refers to the ability of a percent to endure market volatility.
In the world of investments, there is a direct relation relationship between
expected return and risk. Higher the expected return, higher the risk. There is
a trade –off between expected return and risk taken. If you are unwilling to
assume risk you must be satisfied with the risk free rate of return. If you wish
to try to earn a larger rate of return, you must be willing to assume a larger
risk.
Here it should be noted that although higher return definitely assumes higher
risk, higher risk may not be guarantee of getting higher returns. This is
because the trade-off between risk and return is done before making an
investment, in anticipation of a higher return. The actual returns against the
risk taken might be different than anticipated. Return could be higher, flat or
lower. Risk is hard to quantify as it is a subjective measure. Ultimately, the
level of risk you are prepared to take often comes down to whether you can sleep
at night without worrying about the volatility.
Risk tolerance is a qualitative analysis and is based on individual preferences,
attitude, financial situation, future goals, time horizon, stability in life,
investment options available, and many other factors.
The question, then, is how to determine the risk one is prepared to take. One of
the sophisticated ways to establish risk tolerance is to use a risk tolerance
questionnaire having multiple choices to choose from. Such a questionnaire
captures your responses to given situations, and it then analyses the responses
to form an opinion.
This provides a guide to how much investment risk you are prepare to take. For
instance, if you are not prepare to lose more than 5 percent to 10 percent of
your original capital over the next year, you should have relatively small
exposure to equity markets.
Understanding your risk tolerance is important to decide on your assets
allocation. You can take a risk tolerance test on the internet and check the
result. If needed, take professional help.
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