How Much to Invest?

Capital Requirements | Goal-Based Financial Planning | Retirement Planning

How much you should invest depends on how comfortable you are with risk. High risk options like the stock market may have higher payoffs in a shorter term while lower risk options like Fixed Deposit schemes give profits over the long term while providing more security for your capital. To maximize your returns, you need to spread your investment capital evenly across different options (low risk & high risk). How much you should invest will depend on your investment goals and the time periods involved. For example, if you are planning for your children’s higher education, you’ll need to consider (i) how much you’ll need and (ii) after how many years will you require this amount. You’ll also need to account for inflation. Then, compare the returns of different instruments and choose the one best suited to your requirements

Some investment strategies like a Systematic Investment Plan (SIP), diversified portfolios and new instruments like capital guarantee are designed to beat the market risks.

If you are new to equities, and still trying to understand how things work, start with a risk-free equity-linked plan like the Kotak Safe Invest Plan II.

Also see: What percentage of your earnings should you mark aside for investments?

New investors often start investing without planning. Planning your investments is imperative to the kind of returns you can expect and when to expect them. Remember: everyone’s needs are unique, i.e. different goals will have different strategies. Do not try to copy what your neighbour/colleague/friend does. Here are a few simple steps you can follow to plan your investments.

1. Write down your financial goals (child’s wedding, retirement, child’s higher education, etc.).
2. Calculate the amount you feel you will need for each of them (remember to account for inflation).
3. Put down timelines for each of your goals, i.e. how many yeas later will you require that amount.
4. See how much of your earnings you can safely invest each year (remember to keep some savings aside, and account for any foreseeable growth in earnings – which means you may be able to invest more next year).
5. Study the returns of different investment instruments (remember to account for inflation).
6. Choose the instruments that best suit your needs and allocate different amounts for investment in each of them.

It’s a good idea to review the plan regularly with a licensed financial adviser or broker.

Also see: Investment Tips

Planning for retirement is not as simple as it sounds. You need to consider your current expenses, guess at your future expenses and account for inflation. You also need to set aside an amount for emergencies.

To get a rough estimate of how much you need after you retire, just follow the steps below.

1. Calculate the number of years left to retire (use the relevant multiple in the table below)
2. Calculate your current monthly household expense
3. Multiply these two numbers with the magic number 123 and this is the amount you need to save for your retirement

Also see: SIP Calculator | What is the benefit of a SIP? | Why is a long term investment required in the market? | How soon should I start investing? | Investment tips

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