Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

THE ART & SCIENCE OF INVESTMENT PLANNING

Managing your money requires more skill than making it! Four investment jingles you must learn for happy investing!

   Investment planning is both an art and a science. It is a science, since it is based on sound information, tested principles and logical statistics. However, it is also an art, since it involves intelligent analysis, judicious decision-making and a sixth sense of visualization. The key to successful investment planning lies in making the right choice of investments which best suit your requirements.

   What are the important considerations which you as an investor must keep in mind while planning your investment portfolio? Security, yield and liquidity are the three guiding stars which should influence any investor in making his decision.

 DON’T LAY ALL EGGS IN ONE BASKET

    The prime consideration for any investment is to ensure that money grows. However, no one would want growth at the risk of the very existence of his capital. Security is, therefore, the most important factor you should like to consider while making the choice of your investment. At the same time the dictum that ‘safer the investment, lower the yield’ should also not be forgotten. Planned adventure and calculated risk carry all the potential for earning a big fortune. While an investor cannot afford to be unduly adventurous, he would also be well advised not to be over cautious. The ideal strategy would be to strike a correct balance between the two. This should be like thinking of a perfect menu for dinner — not too bland, nor too spicy; not too sour, nor too sweet. A little bit of everything would make the meal more delicious and digestive.

     As a prudent investor you should aim at building up a diversified portfolio by remaining well informed and watchful of the trends and currents in the Investment World. This would help you to achieve the desired objective of ‘minimizing your risk and maximizing your return.’ An investor who has put this philosophy into practice does not have an occasion to repent. So always remember: ‘Don’t lay all your eggs in one basket.’ 

 MEASURE YOUR EFFECTIVE YIELD

    As seen above, the quantum of yield is intimately linked with the security of the investment. No wonder every investor looks forward to net the highest possible yield within his set parameters of security. An ordinary investor is likely to be easily carried away by alluring advertisements or propositions of so-called high yields on investments. However, you as a prudent investor would very much want to ‘measure your effective yield’ and base your choice of investments on practical and realistic considerations. In this context, you must have a close look at various important barometers for measuring the effective yield on your investment.

 SET YOUR INVESTMENT TIME-TABLE

    After security and yield, the next important consideration for an investor should be the ‘liquidity’ of his investments. You invest to ensure that money grows and grows higher and faster. But the best of the growth at the cost of liquidity has no value. You would be most disappointed if you cannot use your money when you want. At the same time, you cannot afford to keep your money pay a price for it in the form of a lower return

    To resolve this crisis, you as a prudent investor must ‘set your investment time-table.’ You must ensure that the maturity of your investments is evenly spread over the years. This will enable you to enjoy the best returns, also assuring you of the desired liquidity from time to time. In this context, you would be well advised to diversify also your investment portfolio in such a manner that in case of need, you can easily raise finance by borrowing against suitable investments or by liquidating readily marketable investments.

 BUILD YOUR INVESTMENT PYRAMID

 Plan your investments in the form of an ‘investment pyramid,’ as under:

  •  A broad and heavy base of safe and secure instruments earning a sound and steady return.
  •  A centre built of medium risk assets earning a higher yield.
  •  A planned light top of adventurous investments with calculated risk carrying all the potential for  earning a big fortune.

        No storm can ever upturn your solid base. And even if you lose the top, you can still make up for that. But if it all clicks, that small top can create a new pyramid or two! Remember, savings alone cannot make you rich, but smart investments will. So make a firm resolution for the New Year 2014 round the corner, to practice and perfect the art and science of investment planning!

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