Is Your Portfolio Right For You?
We are all aware that eating a balanced diet is essential to good health. What is easy to forget is the fact that the right diet for you may not be the right diet for me. Age, gender and health issues dictate the proportion of nutrients essential for a balanced diet.
Just like you determine the right proportion of nutrients to keep yourself physically healthy, you need to determine the right asset allocation for your portfolio to stay financially healthy.
Determining if your asset allocation is right for you depends on the following factors:
Goals: What are your goals?
When you create a nutritional plan you always have a goal in mind. Goals like 'building muscle'. This knowledge helps you create a high protein plan that should help you achieve your goal of building muscle.
Take a few minutes and chart out your investment plan. List down the financial goals that you would like to achieve in the near and distant future. Goals like going on vacation this year, buying a car in 3 years or creating a higher education fund for your child.
By taking this simple step, you can create an investment horizon that can help you shortlist what type of funds are right to achieve your goals.
Investment Horizon: When do you need to achieve each goal?
Knowing your investment horizon can help you determine what type of funds aligns with your goals. This is an essential step. After all, if you don't eat the right nutrient 'protein' you won’t build muscle. If you don't have the right assets 'schemes' you may not be able to fulfill your goals on time.
For example, if your goal is to take a vacation this year, you should probably choose a Liquid fund that is relatively less risky, may generate reasonable returns and has high liquidity
If your goal is to buy a car in 2 years, you can probably choose a Liquid or Debt fund that has a low risk level.
If your goal is to create an education fund for your 5 year old that is accessible in 12 to 15 years - you should probably choose an Equity fund that may offer long term capital appreciation and may help you beat inflation.
Risk Capacity: How much risk should you take?
Your risk capacity is similar to your immunity system. When you are a young adult it is strong. You have the capacity to work all hours of the day and eat junk from the street without falling ill. As you grow older, your ability to eat anywhere without falling ill - gradually gets lower.
Your investment journey follows a similar path. To potentially be successful, you need to re-balance your portfolio's assets as you move through life's stages.
Stage 1: Young & Independent : At the start of your career, you may not have significant amounts to invest but you do have the capacity to take risk. You may want to maximize growth opportunities with an aggressive high-risk investment strategy, to potentially earn reasonable returns.
Stage 2: The Family Man/Woman : Once you have settled down and begun a family, you need to be more conscious of taking risks. You should modify your growth-focused investment strategy to include consistent and low risk assets.
Stage 3: The Golden Years : After you retire, your investments become your source of income and security becomes a priority. You can move to a low-risk investment strategy.
As you can see, the path to good health - physical and financial - is a life-long journey. You have to keep balancing and re-balancing your diet and assets to achieve your goals.
Start today to get physically and financially healthy!
An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund
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