How to plan your investments to achieve your short-and long-term goals The returns from some investments, such as those tied to equity, may exhibit significant short-term fluctuations, but offer favourable returns over extended holding periods
Leane has created a diversified portfolio of investments. However, she has been randomly tapping into her investments to fund her goals, only to find herself disappointed. Whether due to inadequate funds, liquidity constraints, or losses upon redemption, her choices have often left her unsatisfied. While Leane lacks in-depth knowledge about investments, she understands the concept that various investments yield different types of returns. Now, she is wondering how to leverage this understanding to ensure optimal utilisation of her investments.Leane should consider the returns generated by a financial product to determine its suitability for a goal. The returns from some investments, such as those tied to equity, may exhibit significant short-term fluctuations, but offer favourable returns over extended holding periods. These investments entail uncertain returns, which may vary for different periods, making them unpredictable in advance. However, they are well suited to Leane’s long-term goal of wealth accumulation, offering the potential for favourable outcomes over time.
This time frame allows the balancing out of lower return periods with higher ones, enabling Leane to capitalise on superior returns generated over the longer holding period. However, if allocated to immediate goals, Leane may encounter diminished value due to potential fluctuations when funds are needed. Additionally, the volatility in returns makes these investments ill-suited to goals that require consistent and periodic returns.
The investments with fixed and predetermined returns, such as interest from fixed deposits in banks, offer a known, expected return. Such investments are suitable when Leane may need a defined payout, such as paying the education fees for her children. While their predictability is an advantage, it may also mean lower returns. If utilised for long-term goals, which require accumulation of funds over a longer period, it might be inefficient. However, if Leane prefers the lower risk associated with such investments for her long-term goals, she should ensure that the periodic returns are immediately reinvested so that she does not lose out on the compounding benefits for her investments.
Categorising investments on the basis of the nature of their returns will help Leane align these to their time horizons. Her investment portfolio needs to have some exposure to growth-oriented and incomegenerating assets depending on her current needs. As her requirements are likely to change over time, she must establish a process to monitor and rebalance her portfolio so that it consistently meets her evolving return objectives.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
