Goal based investing in real estate
Grounded in the principles of asset pricing and portfolio optimization, the goal-based investing approach leads to the design of investment solutions that truly. A great example of a realistic goal is obtaining one real estate property within a month time frame. Break this goal down into smaller and. ASSETS include all your available resources: monetary assets, securities, real estate, employment income, social security, etc. LIABILITIES are loans, mortgages. SHARKS VS PENGUINS
So you could either postpone or drop the goal or try to increase your investing surplus. Where Can You Invest For Your Goal-based Investing Plan There are various avenues for investments that you could choose based on your risk appetite and expectation of returns. It is always good to be aware of all the investment avenues so you know what to expect from each of them.
Taxation of the returns is another factor which you should consider. Some available avenues for goal-based investing in India are: Investment avenue Suitable for Goals in Taxation Recurring Deposits — These are fixed monthly deposits made in a bank or a post office at a fixed rate of interest.
Low risk as the rate of return is known and guaranteed. Short-term Taxed at iIncome tax slab determined by the income tax department. Liquid Mutual Funds — These are mutual funds that invest in high-quality fixed income financial instruments that mature in less than 91 days.
Low risk as the invested amount is protected and due to the short term nature of the investment, the interest rate risk is minimal. Short-term Short term gains taxed at your income tax slab. Debt Mutual Funds — These are mutual funds that invest in fixed income instruments over medium to long-term.
Low risk as these funds invest in interest-paying securities. As the investment horizon is longer, there may be fluctuation in the interest rate. Short to Medium-term Short-term gains taxed at your slab. Equity Index Funds — These are mutual funds that invest only in stocks on the stock indices such as the Nifty 50 or the Sensex.
Medium risk as index funds do not invest in stocks other than the index stocks. An Index is a collection of stocks from different sectors so the risk is diversified. Equity Mutual Funds — These are mutual funds that invest primarily in equities shares of various companies based on the objective of the investment. High risk as the fund manager aims to excel the performance of the fund vis-a-vis the benchmark it is set against.
Some bets may fail. Equities — These are direct investment in stocks of various companies by the investor. Highest risk as the investments may fail if the investor does not do his research well before investing.
Investing for short-term goals If you have to meet a goal over the next years, the goal is called a short-term goal. Based on expected returns, set aside a fixed amount to invest in the earmarked category of fund. Debt mutual funds could allow you reasonable returns over the short term. As we see from the table above, debt mutual funds invest in bonds or other instruments that earn an interest, so the risk incurred is lesser.
The returns are also lower in comparison to equities, but they are higher than returns on bank fixed deposits. A recurring deposit may be an option if you prefer a risk-free option. Investing in equities for such short terms may be risky. Investing for medium-term goals Medium-term goals are those that are achievable over years. Medium-term goals provide larger scope in choosing investment avenues.
If you are comfortable taking some amount of risk, you could do an mix of debt and equity mutual funds or stick with equity index mutual funds. As investing in equity funds can be risky, adding some amount of debt mutual funds can balance out the risk.
Equity index funds are a form of passive investing where the fund manager just aims to mirror the performance of the index. This lowers the risk compared to an equity mutual fund where the fund manager looks to beat the benchmark with active stock selection. An aggressive investor could do an equal mix of debt and equity mutual funds to achieve a medium-term goal.
Investing for long-term goals Long-term goals are those that are over years away. As there is some time for you to achieve the goal, you could afford to take risks here. Equity mutual funds or investment in direct equities shares of individual companies are the two solutions that you could try to get the required amount to meet your goal.
You need to make savings your target. Here you have to set a target savings out of your total income and look to reduce routine expenses to the bare minimum and look at all your discretionary spending as residual. That is the only way you will have adequate savings to fund your long term goals through intelligent investing. You can achieve more by saving less In economics we call it the power of compounding. The beauty of money is that it compounds because not only your principal but even the income earned by your investment generates income.
The earlier you start the better. For example, if you started a mutual fund SIP with a monthly investment of Rs. And all this with a monthly outlay of just Rs. Now if you started 10 years later, you will have only 10 years of investing left with you. In that case, hold your breath, you will have to invest a whopping Rs. That is why in any savings plan, you can achieve more through your investments if you start off early. Let your investment goals be driven by data The beauty of goal based investing is that your decisions are actually driven by credible data.
For example, when expected returns on equity, volatility and inflation are factored in after considering the empirical data for a longer period for a longer period of time, then your assumptions become more fine-tuned and therefore your results become more achievable. Your investment must be towards a tangible outcome This is one of the most important contributions of goal-based investing. Because you know what your long term goals is you know the monetary implication of that goal.
Since you know the monetary outcome of that goal, you know the tangible outcome that you need to work towards. This enables you to plan your savings, tweak your investments and monitor their performance with that tangible goal in mind. Vague goals really cannot take you too far and therefore your investment will become more haphazard rather than being focused on your goal. That creates a big mismatch in your original asset allocation.
As a result you will be forced to reduce your equity component accordingly. This instils in you a discipline to automatically take money out of the market when it gets overpriced.
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