Arjuna (Fictional Character): Hi Krishna! That sounds like a lot of money. Why use such a big number? Most people don’t start with that much.
Krishna (Fictional Character): Excellent point! We use Rs.1 crore to illustrate the importance of strategic planning. Even if you’re starting with a smaller amount, a well-thought-out plan is crucial.
Many new investors make mistakes because they act out of fear of missing out, which can lead to poor investment choices.
Arjuna (Fictional Character): What’s the first step in this process?
Krishna (Fictional Character): The first step is to understand why you want to invest. It’s not about the fear of missing out or what others are doing.
You need a clear goal. Whether it’s for retirement, your child’s education, buying a house, or something else, having a specific objective helps you determine the investment timeline.
Arjuna (Fictional Character): For example, if I’m 35 and investing for retirement, I have about 25 years to invest. That’s a long period, so I could afford to take some risks, right?
Krishna (Fictional Character): Exactly! A longer investment horizon allows for more risk-taking.
On the other hand, if you’re investing in your child’s higher education and they’re 12 years old, you have about 6 to 8 years. This shorter timeline means you’ll need a mix of high-return and stable investments.
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Arjuna (Fictional Character): I see. Once I know the purpose, how do I figure out how much to invest? (Step 2)
Krishna (Fictional Character): That’s the next step. You need to determine the amount based on the current cost of your goal.
For instance, if your goal is your child’s education and it costs Rs.50 lakhs today, you must account for inflation. With a 10% inflation rate, the cost in 20 years might rise to around Rs.3.33 crore. So, you need to plan your investments accordingly.
Arjuna (Fictional Character): Got it. And where should I invest this money? (Step 3)
Krishna (Fictional Character): Ah, the where is crucial! Different investments come with varying risk and reward ratios.
For example, equities or stocks have historically offered high returns. The Nifty50 TR index has averaged 14.13% over 15 years. However, they also come with higher risk.
Krishna (Fictional Character): Debt instruments typically offer returns between 7% and 8%, but after taxes, the net returns can be lower.
Real estate, particularly residential property, usually yields returns of around 6% to 7%. However, real estate has issues like liquidity and maintenance costs.
Arjuna (Fictional Character): So, it’s not wise to put all my money into just one asset class?
Krishna (Fictional Character): Correct. Diversification is key. Spread your investments across different asset classes based on your risk tolerance and financial goals.
To assess your risk profile, you can use tools available in the internet apps/sites like ET Money and other similar apps/sites. It’s a quick way to determine your risk appetite and find suitable investment options.
Arjuna (Fictional Character): This makes sense. Thanks for the guidance, Krishna!
Krishna (Fictional Character): You’re welcome, Arjuna! Remember, investing wisely involves understanding your goals, calculating the required amount, and choosing the right mix of investments.
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Arjuna (Fictional Character): I’ll do that! And I’ll make sure to read all scheme-related documents carefully before investing.
Krishna (Fictional Character): Absolutely! Safe investing requires diligence.
Source: ET Money
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