‘How much risk an investor can take’ and ‘how much risk he should take’ are two very different things. ‘Invest as per your risk appetite’ is half-decent advice. However it is not universally valid. A person who hates equity can choose to avoid it only if he can afford to regularly invest a sizable (often impractical) amount of money for long term goals. A person who loves equity cannot invest in it if his goal is only a couple of years away. The investors risk appetite is relevant only when the goals risk appetite is also accounted for.
One of the first steps towards taking control of ones financial life is to list down all long-term and short-term goals that one needs funds for. The next step is to use a calculator to estimate how much one needs to invest for each goal independently. The results can often be frightening and sometimes even depressing. The total monthly investment amount needed to achieve all long term financial goals (let us call this Y) is often out of reach because of low salary, high expenses, liabilities and so on.
Beginning to invest for a long term goal in accordance with a plan is an important first step. Once the investing process is underway,
- performance of the instruments chosen have to be monitored
- the portfolio rebalanced
- the goal plan re-evaluated annually and
- a few years away from the goal-date a plan to shift funds from risky instruments to risk-free instruments should be in place.
Among these steps portfolio rebalancing is a concept not well understood by many. Let us first try to answer, why a long term investment portfolio should be monitored? This will naturally lead us to the idea of rebalancing. We will then look at the types of rebalancing and which among them is optimal.
A recurring deposit (RD) is a terrific instrument for meeting important short-term goals. If I can claim to have some financial discipline it is because I observed my parents open RDs for meeting their short term goals ranging from paying insurance premium to my school fee. For the new generation of investors I guess the RD could be introduced as a SIP in a debt fund with a predetermined rate of return!
Use this excel file to track returns from your SIP and lump sum mutual fund holdings. I have had several requests for making something like this. Didn’t do much about it until Mr. Vijay Hegde sent me his tracker file for inputs. I got inspired by it and decided to build one from the ground up with no resemblance to existing trackers.
UPDATE: March 2014: Automated Mutual Fund and Financial Goal Tracker is now available for download.