Why attitude to risk matters when investing

Last week a typical new parent wrote into us seeking what investments should he get into to safeguard his child’s future education and marriage expenses. It is good to start planning early when it comes to long-term financial goals, as one can benefit from the power of compounding and also experience the goal being achieved over time with regular investments. A first step would be to have different investments to achieve different financial goals. So, have a plan for your child/s education and one for their marriage.

Start with SLR – Safety, liquidity and returns, which in turn will decide the risk you can take and the type of instruments that you can then invest in. Child’s education in your case is a good 15-18 years from now, so liquidity is not a must for this goal, the returns should be above average to achieve your target over the time span and safety should also be there for money to be there when needed for this goal. Unlike the goal to buy a car or go on a holiday, which can be deferred, child’s education is not negotiable and should be hence planned well and worked towards.

Equity tilt

Equity is an asset class in which you must invest for any financial goal which is 10 years or more to materialise. In your case child’s education and marriage are both many years to come through and hence equities is an option that should be considered, similar to any retirement plan that you may have. Using any of the online SIP calculators, you can arrive at the monthly sum that you need to save and invest to achieve this goal. Invest in a diversified equity mutual fund through a monthly systematic investment plan (SIP) in a fund with a proven track record and history.

Wherever possible, invest in instruments that also provide for tax savings. For instance, you could invest in mutual funds that offer tax benefits on investments and are tax free on completion of the lock-in. The equity linked savings scheme (ELSS) is one such instrument that you should consider to invest in – you will save tax on contributions that you make and also benefit from the redemption after the mandatory three year lock-in, which is tax free. By investing in such instruments you ensure that you can get more bangs for your buck, which is what is sought for when investing for the long run.

Yes, we have been advocating investments for the long run to have a dash of equities because in the long run, it is one asset class which has all the necessary ingredients to beat inflation and post returns which are commensurate with achieving financial goals that are a good 10 years from now. As you approach the year when you need the money, start moving the capital to less volatile debt instruments or even a bank deposit to double makes sure that you have the money that you need and when you need it. 

olmdesk@outlookindia.com