After talking to lot of people and based on our research we have compiled a checklist that will help you to select the right mutual fund for you. When it comes to investments there is no one best investment for everyone, it varies from person to person based on their financial goals, investment horizon and risk tolerance.
Before you select for yourself whether you want to invest or not invest, there are 3 pre-requisite steps.
Step 1: Define your Financial Goals – Each one of us has different goals and it takes money to accomplish our desires and goals. It is important for you to write down your goals and approximate the money you will be needing to achieve those goals.
Example of Goals are Buying a house, Going on an international vacation, Saving for higher education, etc
Step 2: Time Horizon – here you need to estimate how much time you have to accomplish the above-mentioned goals. We request you to be realistic with your time horizons and don’t chase high risk investment products as they come with additional risk.
Step 3: Risk Tolerance – Based on your financial strengths, income streams, age, time horizon you can understand your risk tolerance. The risk tolerance ranges from safest (the returns will be low even to beat inflation) to riskiest (there is a risk of principal loss). Ideally you need some trade-offs based on your personalized situation to select right investment products for yourself.
We would like to remember you that no estimate is accurate and we believe estimates, forecasts are just guiding points to start moving in the right direction. Only after you have jot down your financial goals and estimated your time horizon and risk tolerance, you should start thinking about where to invest. The above three steps will help you to create a personalized investment objective for yourself.
If you have done this effort of setting up goals, thought about time horizon and your risk tolerance. You can very easily eliminate lot of investment products just by having a sense of your investment objective.
For Example, if you are saving for your higher education that is two years down the line you might want to have major portion in debt products and little to no portion in equity linked instruments. Similarly, if you are building your retirement corpus that is 20-25 years down the line you can have majority of proportion in equity instruments and as you gradually move nearer to your goal you change your asset allocation between equity & bonds.
According to Jack Bogle, founder of Vanguard Group and known as the father of index investing, asset allocation is more important than security selection for long-term investment success. If you would like to know more about Asset allocation, refer to our previous article Why you need to rethink Asset allocation
It is also recommended to revisit your goals, risk tolerance and time horizon every year because they keep on changing based on major life events. For example, if you get the opportunity for a course in top university of the world you might want to postpone some goals here and there. Revisiting your goals on an annual basis will add flexibility and improvisations to your plans.
A financial advisor can help you determine the right products based on your investment objective. Feel free to schedule a call with us here Consult Us, we will help you create an investment plan best suited for your goals and investment objectives.