It is easy to get caught between magazines, columns, newspaper, blogs, television..and wonder how to invest. ‘Top 10 funds’ , ‘Must invest in these shares’ and ‘Rakesh J’s portfolio’ you keep wondering what to do. Should you buy when a good company like Sun Pharma falls from 1100 to 750? or should you wait for it to fall further. Should you do direct equity or mutual funds? If you are invested in Hdfc equity should you sell and go to Icici Pru Value discovery? are they similar ?
Tough questions..no, I am not answering them. I am laying down some simple principles for investing. You first have to do this..
- Set your goal: find out for what you are investing. Is it for your daughter’s KG class admission 2 years later or for her higher education 19 years later? that will put the time horizon in perspective. 0-2 years is very short term, 2-5 years is short term, 5-8 years is long term and more than 8/9 years is longer term. Something like 30 years or ‘forever’ is very long term. Now ask yourself the following 3 questions:
a) how will I react if the value of this investment changes when I am 3 or more years away from the goal?
b) how long will I stay invested or at what stage will I pull out in fear?
c) how good is my investment knowledge to fight the media thrusting me with ‘hot’ data?
2. Estimate your Risk Profile: there are many risk profile calculators..use them and be as factual as possible. Preferably sit with your spouse so that your ‘bluffing’ will be called!! Or sit with your Investment adviser.
3. Diversify Sensibly: You will need to decide (based on your goals) how much money to put in each asset class – Debt, and equities. Do not consider you house as an investment, it is your usage asset, so let it be. In equity decide how much in equity mutual funds, how much in direct equities, bond funds, direct bonds…etc.
4. Consider Taxes and Inflation: they can have a dramatic impact on your over all returns.
5. Just Do it.
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