The first and most important step in your life as an investor is to define your goals at the onset of your investing activity. This will map the road ahead for you in terms of time, amount, type of asset and risk. At this point of time you must also decide how much you are willing to save. When you look at defining your goals think carefully and try to include all your requirements, here are a few things that might help you :
Retirement – In how many years?
How much money will you need?
How long will you need it for?
Daughter’s/Son’s wedding – When and how much?
Daughter’s/Son’s education – When and how much?
Purchase of big ticket items e.g. House, Car etc.
Again, when and how much?
A simple way to get an overall perspective is to draw a time line starting from today with the amount you have saved up till now labeled at time zero. Going forward you can label your major outflows as and when they occur till retirement and then the steady outflows for your retirement income. Please remember your worst enemy “Inflation” and factor this into your targets. Remember that in an inflationary environment an apple will cost more tomorrow than today. For example:
Let us say that you have Rs. 5,00,000 saved up today. In addition to this you figure that in year 10 you will need Rs. 5,00,000 for your daughter’s wedding. Also you decide with your wife that you will retire in thirty years time and will need Rs. 6,00,000 per year for 15 years after that. You also decide that you want to play it safe and want to invest only in debt products. Taking an annual rate of return of 7.00% you will have to save Rs. 38,042 per year for thirty year and you will be able to withdraw Rs. 4,61,958 (5,00,000 – 38,042) for your daughter’s wedding in year 10. Another scenario with 9.00% is available as well.
Now let us assume that you and your wife require Rs. 20,00,000 per annum for 15 years after retirement and want to spend Rs. 15,00,000 on your daughter’s wedding. Knowing this you decide to take the additional risk of investing your money in equities that historically do tend to provide double-digit returns in the long run. Assuming an annual rate of return on 13.00% per annum you would have to save Rs. 36,328 per year for thirty years to achieve your goals. An example with a 15.00% return is provided as well.
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