Standard and Poor survey report speaks about India’s alarming Financial Illiteracy at 76%. Hereby implying that they fail to understand the basic financial concepts and thus making them incapable to undertake vital financial calls.
The world of investment is constantly changing while offering dynamic opportunities and innovative products. With the help of this 4-K Formula, one can perceive and achieve their financial objectives.
The 4-K Formula
1. Know Your Financial Goals & Timelines
As trite as it may sound, it is important to be specific and one must not overlook this very first step of investment planning.
Let me share a very interesting experience of an elderly businessman who had been investing with an objective to accumulate a sizeable retirement corpus. However, at his retirement age of 70, his portfolio had 64% of investments in closed ended funds. Meaning he cannot redeem them until its maturity date. This is a case of complete mishap between the goals and its desired timelines.
Align your financial goals and timelines distinctively, to ensure the right selection of roadmap for your investment process.
2. Know Your Risk To Investment Approach
‘100 minus your age should be the ideal allocation to equity’ – A classic approach used to set your asset allocation strategy. However, it is not as simple as it seems, what one needs is a tailor made split between the five broad asset classes – Debt, Equity, Gold, Real Estate & Alternative.
This is entirely derived from your risk assessment parameters. One needs to identify the right risk of the desired financial goal and the timeline. This will institute a strong foundation for your long-term portfolio while considering your goals and risk.
3. Know How Successfully You Are Diversified
Even an amateur investor would endorse the importance of diversification. But the point drawn here is, how successfully one diversifies their portfolio, and this can be explained with the help of another instance.
There was an investor who had been doing SIP for 8 years with an objective of funding his daughter’s marriage. Due to the Covid-19 pandemic, his portfolio stands in negative today. However, there were several reasons identified for this mishap, but one crucial point was over-diversification in poor quality funds. The art of successful diversification entails robust research and requires fundamental deep diving in various investment opportunities. This is where the domain expertise comes into the picture and thus signifies the importance of a financial advisor.
4. Know Your Desired Returns & It’s Related Cost
Every investment we make involves a recurring cost. This cost needs to be in line with the desired returns. Expensive investments do not evince high returns. In fact, studies show that low cost investments have exhibited better performance over a longer run when compared to expensive ones. As a percentage of the total investments made, these costs might sound scant at first, but the compounding effect of the same have a sizeable impact on long-term portfolios. And this calls for a monthly or quarterly review of your investments. After all it is your hard-earned money that is at stake.
And To Conclude
Prudent investing is a science which requires simple understanding backed by strong experience. This 4-K Formula will act as a shock proof framework for any investor and assist him to execute his financial planning in the most optimum manner. And this can be further pepped up by partnering with a Financial Advisor.
Hope you have a safe year ahead.
Cheers & happy investing!