How should you align your investments to financial goals?

Usha Iyer has received a lot of conflicting advice about investing ever since she started earning. Her parents, who are somewhat traditional, think that she should buy an apartment and invest in gold before she gets married, while her colleagues tell her that trading in stocks and derivaties can be exciting and rewarding. Meanwhile, her financial adviser has asked her to begin investing in mutual funds. Whose advice should Usha take and how should she manage her investments?

Usha should begin by aligning her money management with her personal goals. She should make a list of goals she wants to achieve over the next five years or so, and then make investments, keeping in mind how she expects her financial life to pan out over the period. She should also watch for changes and modifications as she goes along. Since she has started working only recently, she should begin by asking herself whether she sees herself holding down a job over the next five years.

If Usha is confident about her job, she should next consider whether she would be able to save a portion of her income consistently over time. If she is able to save a steady amount while living with her parents, she is ready to invest that money and get it to work for her. The investments she chooses will have to be aligned with the goals she plans to use them for. Pursuing a master’s degree and partially funding her own wedding may be goals that need her attention.

If she plans to move cities after marrying, investing in property may not be a good idea, while some investment in gold could help. It is also possible that she would not need to liquidate all her investments in the next five years for any of her goals. She should split her investments into two portions: the core which will be built for periods longer than 15 years; and the satellite which will fund any arising requirements.

The core should be invested in PPF and equity mutual funds, and allowed to accumulate over time. The satellite should be invested in bank deposits, short-term debt funds, bonds, and gold. She can begin with a 50:50 ratio of the two. At this stage, she should avoid trading in stocks as it can be risky.

(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)