When you go shopping you’ll check things like the brand, quality, style, size etc. Similarly, before deciding where to invest your money (i.e. choosing the asset class) you need to keep in mind so many factors.
Heard of the phrase ‘age-appropriate‘ attire, the same applies to your investments. So, whether you’re looking for clothes or investments, age matters. Younger investors have fewer responsibilities and a long time horizon and that’s why they can take the risk. So they invest more in riskier options like equity and less in safer options like FDs. And when they invest they must continue increasing their investment amount in alignment with their increasing income. However, as and when they grow older, they should revisit their portfolio and adjust it accordingly.
Experts suggest as a thumb rule that you should subtract your age from the number 100, and that’s the proportion of your money you should invest in stocks. The rest can be invested in “safe” investments like as FDs & Debt Funds. So a 20-year-old would have 80% of her assets in equity, while a 60-year-old would have 40% in equity.
Depending on the purpose of investing you can select your asset class. For example, investing for your children’s marriage is a long term goal and investing for a car is short term goal. For short term goals, you should opt for a safer investment and for long term goals use investments that have return- generating such as equities. This is because, in the long run, these investments aren’t risky.
Other than time duration basis, the purpose can also be classified as negotiable and non-negotiable. For non-negotiable goals like children’s education or down payment for a house, guaranteed return investments would be a good choice. But if the goal is negotiable, which means that it can be pushed back by a few months, then investing in equity mutual funds or stocks can be beneficial.
This is very similar to your shopping impulses. There are some things that you can afford to push buying for a few months while some things are not negotiable at all.
How we all wish to buy a Lamborghini sponsored by our bank balance.
When it comes to investing, you must consider how much income you can spare to invest. This is because investing in risky asset classes could mean making lots of gains or losing all your money.
If you want higher returns the risk involved is also high since risks are directly proportionate to returns. Blatantly putting it: The more money you have to spare, the more risk you can take, and make higher returns from assets like equity. That’s why they say, start investing when you get your first paycheck, which is a time when you have more money to spare!
Also, don’t forget to consider your expenses. You might have a big ass salary package but your expenses like loan payments would be high too. At such a time you need to see how much of your income can be put aside to invest after taking into consideration all your expenses.
From the above factors, it is clear that different individuals will have a different portfolio depending on their age, income, risk capacity etc. But the common factors apply for all:
- Before investing do adequate research
- Don’t fall for different schemes that promise high returns in a short span.
- Check the tax implications on your investments
- Avoid complicated investments like Bitcoins.
Ready to pick your asset class? For further questions comment to let us know.