One day Dronacharya, Guru of the Pandavas and Kauravas decided to test his students on their Concentration. He called all of them and told that today he will test all the students on their archery skill. He said that he has put a wooden bird with a painted eye on a tree across the river, and the students have to hit the eye of that bird with a single shot to pass that test. First he called Yudhishtra. Dronacharya asked, “Please tell me what you can see.” Yudhishtra replied, “I can see the bird, the tree, its branches, and the fruits.” Dronacharya told him to leave the bow and arrow. Similarily he called most of the students and asked them to explain what they can see. Most of them replied in the same manner, and were asked not to shoot by their Guru. Finally, Arjuna was called and was asked the same question. He replied, “Gurudev, I can see only the eye of the bird.” On hearing his reply, His Guru asked him to shoot. Arjuna shot the arrow at the given target and accomplished the task. Then, Dronacharya explained the power of concentration to all the students. If our Goal is clear then we should not let loose our attention to the other details, we should just focus on the goal and it will be achieved.
Similar is the case while choosing our investments, we tend to see other things surrounding our Goals rather than Goal itself. Many a times we choose what we others have to offer without focussing on our requirements. Buying a 5 year lock-in FD for the purpose of buying a car in 3 years won’t help us in achieving that Goal. Sometimes, we also get lured into investments by getting some discount from our broker or a free insurance cover which is actually worth a penny. We should decide on the investments by looking at our key requirements rather than what is being sold to us. By doing this, we will not only achieve our financial goals but also there will be peace of mind with regards to the investments. One can do this by following simple principles before starting our investments.
1. What are your Goals? : You should not simply invest without defining the purpose of that investment. You should first chalk out the financial goals that matter to you most with a clear need to fulfil them, be it your kid’s graduation money, your retirement funding, money for your dream home, or anything else.
2. Goal Timeline: When are your financial goals due? For e.g. you might want to buy a new car in 2-3 years but there are good 25 - 30 years to your retirement. Once you have defined these goals on your life timeline, it becomes easier to manage them.
3. Your Risk appetite: You should also know where you personally stand in terms of taking risk. You should know your comfort zone when it comes to investments. Only if you have an appetite for equity volatility, should you go for equity investments as they are a long term game. You will have to stay invested for a longer duration to get better returns.
4. Where should you invest: This decision should depend upon first 3 parameters discussed above. Let’s say for a goal which will be coming next year, you should not risk investing into equities. If you have ample surplus, you can start investing for all of your goals in a single shot or you can prioritize your investments depending upon the importance and timeline of the goals.
Charu Hastir, CFPCM is founder of www.theriteplan.com. Rite plan is an online financial planning portal created to achieve a single objective of providing easy and Do It Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/