Is your investment in line with your horizon? Confused? Don’t be! Understand this:
When you decide to travel, you choose your destination before boarding the train or plane, right? Just like this, when it comes to investing, apart from knowing your goals and risk-appetite, you need to gain clarity on the ‘Investment Horizon’!
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Investment horizon simply refers to how long you plan to invest your money before you cash it in. For instance, when an individual in his 20’s decides to invest in a retirement plan, his investment horizon is several decades away. If he is 25 years old now and doesn’t expect to start withdrawing from his retirement plan until he is 60, his investment horizon is 35 years.
Need to Define Your Investment Horizon
Many individuals think that investing is just about finding the best investments to grow money as quickly as possible. However, the truth is: to make the right investments; investors need to have a sense of their time horizon, i.e. how long do they expect to own their investment after buying it.
Because by estimating the right length of time to reach the financial goals, one can better plan and, thereby, improve the likely success of reaching those goals.
Another reason why you need to know your investment horizon is because different investments behave differently. For instance, if your investment horizon is one year and if you put your money into the stock market, the chances are that you may be disappointed if all-of-a-sudden the market drops.
Breaking Down Different Investment Horizons
Typically, there are three investment horizons – short, medium and long-term:
- Short-term: up to 3 years
- Medium-term: 3 to 10 years
- Long-term: more than 10 years
Given below are these three horizons and few investments that might be suitable for each one:
|Investment Horizon||Goals||Things To Keep In Mind||Investment Options|
|Short-term||Travel, buying a car, down payment on a home||As you won’t have time to back your losses, you need to consider lower-risk investments.||Best investment plans for short-term:
– Savings accounts
– Fixed deposits
– Savings bonds
– Money market funds
|Medium-term||Saving for child education, buying a property||Since you have some time before you need the money, you can consider investments with a moderate level of risk and more growth potential.||Best investment plans for medium-term:
– ELSS funds
|Long-term||Buying your dream home, retirement planning, funding children’s higher education or their marriage||As you will have many years before you will need the money, you can invest in equity- funds and then switch to balanced funds as you near your goal.
|Best investment plans for long-term:
– Mix of stocks and bonds
Make Prudent Investment Choices
Selecting the right investment horizon is all about planning. You need to carefully think about your goals to select the right mix of investments. Put simply, while selecting the best investment plans for short-term or long-term, understand their time frames, as they vary for different goals and affect the type of risks you can take on.
So, if you are saving for your dream house, investments such as ULIPs are suitable because they offer multiple fund options and life cover as well. Moreover, insurers Max Life Insurance offer guaranteed loyalty rewards for staying invested and tax benefits too. Option to switch funds for free, withdrawal facility and highest claim settlement ratio (98.26%, greater than LIC) are other features of this insurer. Also, ULIPs are one of the best investments for tax benefits – you can get tax deductions on premium paid up to 1.5 lakhs, and the maturity benefit is tax-free as well.
It’s Time to Act, Now!
The key is to learn which financial instruments may work for different time horizons. Remember this: to accumulate the desired corpus, early investment in prudent financial instruments is absolutely essential. After all, even a small amount invested can add up over time!