When investing, people often start with a product they wish to invest in. Be it fixed deposits, mutual funds or insurance plans; many people begin investing without considering the asset class they need. A well-thought-out, goal-based investment plan can help you make efficient and optimum use of the available resources. When you identify life goals upfront, you can keep them in sight and create a separate plan to achieve each one of them. The article helps you identify which goals may need the right asset class.
Are you choosing the investment in the right way?
These are a few questions you may want to ask yourself before you invest in any asset class.
- Are my savings aligned with the financial goals I wish to achieve?
- Do I know the different asset classes that could help me achieve my financial goals?
- Do I know the investment tool I invest in belongs to which asset class?
What are the different asset classes?
- Cash : This includes a bank savings account and other liquid schemes. The general rate of return of liquid funds is around 6%. The volatility of this asset class is low.
- Fixed income This includes fixed deposits, debt funds and bonds. Short-term deposits, short and ultra-short debt funds, commercial papers, tax-free bonds and more come under this asset class. The general rate of return is between 7% and 8%. The market volatility is low to medium.
- Equity or Stocks or Share Market This asset class includes direct equity (shares and stocks) and all other types of equity mutual funds. For example, large-cap, mid-cap and small-cap funds or fund of funds that invest in international markets. If you invest for the long term, these can give you returns around 12%. But, they carry a higher risk for the higher yields they may offer.
- Real estate This asset class includes investments in commercial or residential real estate, land and Real Estate Investment Trust (REIT). The general rate of return is 2% to 3% over inflation, while the market volatility is moderate.
Which asset class should I choose for which asset goal?
It is advisable to align an asset class with the time horizon of your goals. Short-term goals align best with fixed-income asset class, whereas long-term goals ideally go well with equity. Here is a simple approach to help you decide:
- Vacation and big spends Fixed income, mainly short-term or ultra-short-term debt, can be used to meet immediate goals.
- Children’s education If you have less than five years, fixed income can be ideal. If you have more than ten years, equity can be a good option.
- Retirement Equity is known to work best to build a retirement corpus. You can move to debt when you are closer to your goal.
Conclusion
To sum up, identify your life goals so you can choose the right asset class to invest in and properly manage your finances.
You could also consider mutual fund investment after understanding what is a mutual fund. You can invest in direct mutual funds, purchase mutual funds online or approach an asset management company for buying mutual funds offline.
