investment planning

Introduction to investment planning - I

Investment planning is an alien concept for the Indian populace. For a country which till now was worried about making ends meet this emerging trend is definitely a new experience. But, the truth is that if only they would have been introduced to the Art of Managing Money, life could have been so much easier. Most of us spend more than half of our lives working and saving because money is important, in fact crucial. However, most of us spend almost no time planning to make that hard-earned money work more effectively for us. So, how do you plan your financial life?

In a series of articles ICICIdirect's Investment Planning Desk will discuss concepts, ideas and methods of planning, goals, return, risk and various investment options. Concepts such as inflation, power of compounding, stock market jargon etc will be explained in a phased manner.

What is investment planning?
Financial planning is nothing but an assessment of your goals and the steps you must take to help make them a reality.

What you first need to figure out..........

What is it that you want?
Is your wish to retire with a sound lumpsum amount or do you want a steady monthly income. Is your son's education or daughters' marriage worrying you? The key is to figure out your goals.

Where is your money going?
The most important thing is that you should where your money is going. Zero on your monthly and annual expenses.

Why should you invest?
You should invest so that your money grows and shields you against rising inflation. If prices rise by four per cent annually it would not be sufficient if your savings only give you a return of three per cent. It leaves you with a deficit of one per cent. The idea is that your rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time.

Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation. Also, it's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.

When to Invest?
The sooner the better. By investing into the market right away you allow your investments more time to grow, whereby the concept of compounding interest swells your income by accumulating your earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors

1. Invest early2. Invest regularly3. Invest for long term and not short term

There is always a first time for everything so also for investing. To invest you need capital free of any obligation. If you are not in the habit of saving sufficient amount every month, then you are not ready for investing. Our advice is :-

Avoid unnecessary or lavish expenses as they add up to your savings. A dinner at Copper Chimney can always be avoided, the pleasures of avoiding it will be far greater if the amount is saved and invested.

Clear all your high interest debts first out of the savings that you make. Credit card debts (revolving credits) and loans from pawnbrokers typically carry interest rates of between 24-36% annually. It is foolish to pay off debt by trying to first make money for that cause out of gambling or investing in stocks with whatever little money you hold. Infact its prudent to clear a portion of the debt with whatever amounts you have.

In the second part of the article we shall discuss on the preliminary work that needs to be done before investing.