An investment plan, also known as a financial product, is a financial instrument or scheme that allows investors to participate in wealth creation processes as a means of achieving their financial goals. The investment products are mainly determined by the goal, risk appetite, liquidity needs, time frame, and potential returns of the investor.
Typically, such products offered in India include shares, mutual funds, bonds, fixed deposits (FDs), Public Provident Fund Scheme (PPF), National Pension System (NPS), National Saving Certificate (NSC), Unit Linked Insurance Plans (ULIPs), and other similar financial instruments. Some products may provide both investment and insurance benefits.
Such an investment plan may enable you to achieve your financial goals, retirement, child education, purchase of a house, and so on. Investors can also use an investment calculator to estimate potential investment growth based on factors such as the investment amount, expected returns, and investment tenure.
Benefits of investment plans
An appropriately chosen investment plan offers a range of benefits to the investor. These benefits may include:
Wealth creation
An appropriately chosen market-linked investment instrument offers a great opportunity for wealth creation. With compounding, the returns on investments can potentially grow exponentially over time. However, it should be noted that market-linked returns are not guaranteed and may depend on the nature of the investment.
Goal oriented
Through appropriate financial planning, your investment may be directed towards the achievement of a certain financial objective. This is because the corpus size, period, and the amount contributed towards such an objective will have been predetermined. When planning for goals such as purchasing a house, you can also use an EMI calculator to estimate potential loan repayments and assess how they may fit within your overall financial plan.
Risk management
The various financial instruments have different risk appetites associated with them. Some investment products are highly risky, such as equity shares and mutual funds, while others are considered low risk. The Public Provident Fund Scheme and some other fixed income products offer stability with slightly lower returns depending on the terms and conditions of the product.
Financial discipline
Investing on a regular basis through systematic investment plans helps an investor maintain a level of financial discipline for the achievement of a certain financial objective. The regular contributions assist you to stay focused on your goal.
How to create an effective investment plan
Set financial goals
The first step towards creating an investment plan is to identify your financial goals and estimate the amount of money needed to achieve each of these goals. Next, identify the period in which you would need the money. This is important because it determines the type of investment product that you should consider.
Assess your risk appetite
It is extremely important to understand how much risk you can stand to take to achieve your financial goals. In some cases, a higher risk may be needed to achieve a higher return, and a shorter-term objective requires less risk than a longer-term one. Therefore, the higher your risk tolerance, the more market-linked your investments should be.
Choose from the available products
Based on the financial goals, risk tolerance, and time frame, you can choose which financial instruments to invest in. Some of the investment products to consider include: mutual funds, shares, PPF, NPS, fixed deposits, bonds, National Saving Certificates, and insurance products such as ULIPs.
Diversify your portfolio
The best way to minimize risk is to diversify your portfolio. This is a financial strategy that aims to reduce risks by spreading investments among various financial instruments. It is important to note that diversification cannot guarantee total safety if the whole market moves against you.
Monitor your investments
After setting up your investment portfolio, it is important to monitor and review it on a regular basis in order to ensure that it is performing as expected. If there are changes in your personal financial needs, family status, financial goals, or if the financial instruments underperform, it may be necessary to rebalance your portfolio.
Factors to consider before choosing an investment plan
Risk appetite
Before selecting an investment plan, it is important to assess your risk appetite. This refers to the level of market fluctuations that you are willing to withstand. Remember that most of the market instruments carry some level of risk. Usually, the higher the risk, the higher the profit potential.
Expected returns
The expected returns are the potential gains that one stands to make from an investment. It is important to bear in mind that returns are not guaranteed and may vary depending on the nature of the investment instrument. As such, the expected returns should be used to evaluate the viability of an investment option.
Tax implications
One of the main reasons why one should consider various investment options is the different tax implications that come with each investment. When choosing an investment option, it is important to identify whether the investment or the returns made on it are taxable. It is also important to consider which of the investment options offer tax deductions or exemptions. Some of the investment products that offer tax advantages in India include PPF, Equity Linked Saving Schemes (ELSS), NPS, and Life Insurance Products.
Time frame
Before choosing an investment plan, it is important to consider the period of the investment. This refers to the amount of time that the investment plan will take before the money is withdrawn. It is advisable to choose an investment option based on your financial goals. This is because different investment products have varying risk appetites and liquidity levels. For instance, a short-term financial objective requires more careful consideration.
Liquidity and charges
Before making any financial commitment, it is important to evaluate various features and benefits associated with the investment plan. For instance, one needs to consider liquidity needs and terms of withdrawal. Some investment plans charge penalties on withdrawal requests while others do not. It is important to consider all charges that may affect the investment returns.
Conclusion
An effective investment plan should consider factors such as diversification, goal-based investing, risk management, asset allocation, and regular reviews. When choosing an investment option, it is important to consider the risk and liquidity, charges, tax implications, and other benefits that come with it. In addition, an effective investment plan will enable an investor to achieve their long-term financial goals while avoiding the risk associated with different investment products.
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