If we asked you how would you travel from Mumbai to New York, what would be your answer? An Airplane or a car? Of course, an aircraft you would think. But what about going from your house to the airport? Would you take a plane or a car, then? No, we are not trying to irritate you by asking questions with obvious answers.
Are you choosing the right way?
When investing, many people often mistakenly start with a “product”. Be it FDs or Insurance Plans or Mutual Funds, individuals, in the vast majority of cases in India, begin directly without first considering the asset class they need. The need is primarily either growth in the form of returns or safety of savings.
This approach is often why many major investing mistakes happen. Without first understanding what the savings are meant for, one is likely to end up choosing the wrong asset class without even realising it.
Ask yourself the following questions:
#2. Do I know which asset class (cash, debt, equity, real estate, alternatives) is ideal for my financial goals?
#3. Do I know what asset class does the instrument I am investing in (if you are already investing in something) belong to?
Answering no to any of the above questions means you need to take corrective steps. Thankfully, that’s not too difficult.
What are the asset classes?
While officially, there are many asset classes, the ones you definitely need to know about are the following:
Which asset class for which kind of goal ?
Generally, you should align the asset class with the time horizon of your goals. Long-term goals should ideally go with Equity, while short-term goals align best with fixed income. Remember that within asset classes, there are sub-asset classes that can help you fine-tune the kind of growth or stability, you want.
Here’s a simple approach to decide which asset classes go with which goals: