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Home > India > Business > Business Headline > Personal Finance

4 great tips for safe investing | June 18, 2008 10:38 IST

When it comes to investing, it is commonly observed that investors tend to replicate the investment strategy followed by their colleagues, friends or relatives.

It is generally believed that an investment strategy that has worked for one will also work for others. However, this is the wrong approach, simply because 'one size does not fit all' while investing. Instead, investors need to build an investment portfolio that is right for them.

Building an investment portfolio requires the investor to put in a fair degree of thought and time. The need for the latter is only accentuated in light of the overwhelming choices available. In this article, we present a 4-step strategy that will help investors build an investment portfolio.

Identify the investment objective
The first step should be to identify the investment objective and tenure. In our view, no investment must be undertaken without defining these parameters. For this, you need to ask yourself - "what am I investing for". At any given point, there are likely to be multiple investment objectives that you wish to accomplish, ranging from buying a car to providing for retirement. And each of those objectives will have to be achieved over varying time frames. For instance, buying a car is a relatively short-term need, while retirement planning is long-term in nature.

How to achieve your investment objective?
Once you have defined the investment objective, the next step is to outline a plan to achieve it. While there are a range of investment options (stocks, mutual funds, small savings schemes, fixed deposits, gold, real estate) available, mutual funds should suit a majority of the investors.

Mutual funds are managed by professional fund managers and can be expected to do a better job at managing money than most investors. By investing through the mutual fund route, investors are left with time and energy to pursue their own work.

Of course, not all asset classes are available through the mutual fund route in the domestic context. But it's only a matter of time before that changes; for instance, regulations are already in place for the introduction of real estate funds, one of the big innovations in the mutual fund industry. Investors can already invest in debt, equities and gold through mutual funds.

Depending on your investment objectives you can select the mutual fund option most suited to you. Typically, for a long-term investment objective like retirement planning you can take risk and equity funds can prove beneficial. For short-term needs like saving for a car, debt funds are your best bet.

Select the fund house/AMC
Once you know that you want to achieve your investment objective the mutual fund way, it's time to select the right fund house/Asset Management Company. With an increase in the number of fund houses/AMCs, choosing the right one can be challenging. However, this is easier said than done.

Why is it necessary to invest in the right fund house? Because the fund house must first qualify as a viable investment proposition before its schemes can attain that position. While short-listing an AMC, look for the ones that are process-driven as opposed to individual-driven.

Processes are more enduring and serve investors well over the long-term. Individuals (read star fund managers) can be expected to perform only till the time they are associated with the fund house, once they leave they take the performance with them.

Select the scheme
Once you have chosen the right fund house, the next step in the investment sequence is to select the right mutual fund scheme. Like with the fund house evaluation, there is an elaborate process to select the right mutual fund scheme. Put briefly, mutual fund schemes are selected after they have passed the test on various parameters like risk, returns and performance over market cycles, especially the downturns.

A word of advice�
These are some of the basic steps while investing. Adherence to these steps can ensure that there are fewer surprises along the way. Taking short cuts may prove detrimental to your financial plans. Of course, given that your financial planner is always around to guide you, taking the step-by-step approach to investing should not prove very difficult.

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