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Investment Planning Process: Do It Right

Investment Planning Process: Do It Right

Having a systematic approach to investment planning is what helps us achieve our financial goals in a stress-free manner. It also provides immense clarity regarding the individual’s investment objectives, risk appetite and tolerance, and emotional framework regarding finances. This, in turn, assists in building a suitable portfolio.

1. Ascertaining financial milestones:

As a first step, we need to understand the life stage you are in and the key goals you foresee in the future. It is imperative to note that financial milestones may change based on the life stage that you are in.

If you are single, then it is likely that you have goals such as travel, buying a luxury car, buying a high-end phone, possibly buying a home, taking care of parents etc., many of them could be short-term in nature and few that are recurring in nature. As you advance in your life stage, there are a more significant number of dependents, and more clarity emerges in terms of your long-term financial goals.

You need to, however, remember that irrespective of what stage of life you are in, hedging your life and health risk is essential.

2. Evaluation and enumeration of financial goals:

The most important part of your investment planning is enumerating your financial goals in terms of how much is needed. And at what time period? Factors such as inflation and real rate of interest need to be considered whilst drawing up the corpus for your needs. The most challenging of all would be your retirement planning.

You will also have to foresee the household budget that you would require post-retirement, which typically is a long-term goal. You need to assess the items of expense that would exist and the proportion to arrive at a monthly budget. Based on your life expectancy assumption, you need to arrive at the present value of the corpus required at retirement and discount it to the current time.

After arriving at the corpus for each financial goal, we need to make a realistic assumption regarding potential returns and assess the investment required to build the corpus at a relevant timeline.

3. Risk Profiling, Asset allocation and Selection of Investment Options:

After assessing the quantum of investment requirements, the next logical step is assessing the risk appetite. In fact, there could be a slight overlap between the risk assessment and making assumptions regarding the potential returns on the investments.

Based on your risk tolerance, we would arrive at a mix of assets which includes a combination of debt-equity. If you have a higher risk appetite, the equity portion would be slightly higher than that of a person with a lower risk appetite. However, personal risk tolerance is not the only determinant of equity exposure. Age, nature of the job, tenure of financial goals, number of dependents etc., are also critical determinants of asset allocation.

Asset allocation and selection of securities is an intense process which requires specialised knowledge. You can seek professional assistance to ensure that it is done correctly. Experts at TATA Capital can help you with the process and manage the portfolio’s performance as well.

4. Performance management:

After asset allocation and investments in selected securities, monitoring your portfolio periodically and ensuring optimal performance is essential. Often, the portfolio requires tactical and strategic realignment. Tactical realignment refers to making changes to the portfolio to benefit from the macro environment or market direction.

In contrast, strategic realignment may be required based on any changes in your financial goals or any intermediate financial requirement that may arise. The assets allocated are always in alignment with your financial goals and timeline. They are earmarked to each of your needs to ensure that they are met seamlessly.

The portfolio’s performance is measured against an appropriate benchmark, and it is desired that the portfolio outperforms the benchmark over the long haul.

5. Periodic review of financial goals:

As indicated earlier, there is a requirement to revisit and review your financial goals to ensure that your milestones are aligned with your most recent developments in life. For example, post – covid, there is a change in perspective about health coverage and the creation of emergency funds. Often, the perception was that a group cover offered by the employer would suffice. However, the pandemic was a real eye-opener. There is a need to review and re-evaluate the quantum of health coverage and avail an additional customised coverage which is aligned to your needs. The strategic evaluation of financial goals essentially need not always be triggered to change in your life stage or lifestyle. It can be triggered due to external factors as well.

Investment planning is an ongoing journey and not a destination. You must undertake informed decisions at every stage of your investment planning. Seeking expert advice can help you stay on track with your financial planning. Reach out to financial counsellors at TATA Capital Wealth who can guide you in your investment planning journey.

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