Importance of investment planning and how to go about it

When it comes to investments, most often individuals lack the right guidance and planning for it. They know that money should be invested but it is often not mapped to a financial requirement. This opens doors to further challenges such as not being able to accumulate the required amount as desired, stopping the investment mid-way etc. That is where mapping investment to a financial goal is required and for this to be done right requires planning.

For instance, let us consider the case of Shweta, a bright 25-year old working in a marketing firm in a metro city. She had seen her parents save money and purchase property or gold, from a young age. This experience had made her value money and savings from a very young age and she entered her career with the same mindset. Shweta knew she should save a portion of her monthly salary, with the aim of building a nest egg for the future. However, she was not prepared for the next step – what should she do with her savings? If she let it remain in her savings account, it would earn her a paltry amount in interest and given the rise in inflation, the value of her savings would only drop every year. Since this was counterintuitive, Shweta started to research and began to dive deep into the world of investments. The first thing that caught her eye was the importance of investment planning.
What is Investment Planning?
The term investment planning refers to the process of zeroing in on your financial goals and then building a roadmap to achieve the same. In Shweta’s case, her first financial goal involved saving up enough funds to pursue her Masters’ degree abroad and, for the same, she would require about 30 lakh rupees, 3 years down the line. To arrive at her financial target, she would need to chart an investment plan capable of stable yet strong growth, given the low time frame and the high target. This is where investment planning came into the picture.
Why is Investment Planning Important?
As an investor, Shweta could not invest her money in bank recurring deposits and hope for her savings to reach the target amount. Instead, she would have to create an optimal plan which would help her attain high returns while also ensuring that the risk was minimal. This was because her time horizon was so short – if she lost her savings in the quest for high returns, she would not have enough time to wait for the markets to turn positive and help recoup her losses. Her investment plan would, therefore, consist of well-calibrated investments in both equities and debt, in an attempt to garner high returns from the stock market and ensure stability via the debt component. Further, since she had just started earning and did not have a sizeable corpus to invest through the lump-sum mode, she would have to choose the systematic investment plan route and allocate a portion of her income to monthly SIPs. This would help her with both compounding of interest, in the longer term, and rupee cost averaging, when the markets were down.
How Should You Plan Investments?
Shweta’s example indicates a few important lessons for investment planning – first of all, you need to arrive at your financial goal, or the reason for which you are making the investment. Next up, you must figure out the time horizon in which you wish to accomplish your goal. This could vary from the extremely short term to the short term, like Shweta’s or even the long term, if your goal is to build a retirement fund. Once you have these two aspects at hand, you can easily calculate your return requirements, or the returns you need, to achieve your goal, in the given time frame. Finally, for the last step of your investment planning journey, you will have to take your risk appetite into account. This indicates the amount of risk you are willing to take, in the quest for high returns. The higher your time horizon, the higher your risk appetite can be, and vice versa. So, if you have just started your career and are investing towards creating a retirement fund, you have the ability to undertake high risk since you have the time required to offset possible losses along the journey. Alternatively, if you are close to your retirement, and have a very short time horizon, it is advisable to stick with stable assets like gold or fixed income.

Planning your investments will help you focus on the target and permit you to become more disciplined, while also ensuring that you do, actually, meet your financial goals. So, start your investment planning journey right away and chart your path towards financial freedom. To get this right, it is best to seek the guidance of a financial advisor.

Disclaimer: This article is authored by Sandeep Chhajer, Founder MD, Subh Shanti Wealth Pvt. Ltd. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.