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Equity investments may screw your short-term financial goals.

January 19, 2022
in Equity Fund
equity

What is the equity market?

The equity market is a marketplace where companies’ shares and stocks are traded. In an equity market, equities are bought and sold either over the counter or on stock exchanges. It is also known as a stock market or a share market, which allows sellers and buyers to trade equity or shares on the same platform.

What is equity investment?

An equity investment is basically money invested in a firm through the purchase of shares of that firm on the stock exchange or the equity market.

For short-term goals, investing in stock has a high level of risk and the risk-reward ratio may not be optimal. It is well-known to everyone that investing in equities assets yields tax-efficient returns and beats inflation over the long term. This does not, however, imply that we should put all of our eggs in one basket.

The most important thing to take into consideration when planning for financial objectives is the timeline. However, this is often overlooked while looking for the best returns, whether for short-term or long-term goals.

The equities market’s volatility makes it a dangerous investment in the short term. In this way, long-term equity investments are more profitable and reliable, making them ideal for accomplishing long-term objectives. With stock investments, you’re taking a lot of risks, and the risk-reward ratio may not be in your best interest. For this reason, seasonal investors should refrain from 100% short-term equity investments.

How can you make short-term goals a reality?

Setting financial goals, including short-, medium-, and long-term objectives has to be the first step in financial planning. Short-term objectives usually have a time frame of 6 to 18 months. 

Short-term goals should be accomplished with stable investments such as debt or fixed income instruments that are not swayed by market volatility. However, despite the lower returns, these investments are highly liquid and allow investors to withdraw money immediately if needed.

Short-term goals can be subdivided into quarterly, monthly, weekly, and daily goals, depending on your needs. Investing in a combination of liquid funds, debt funds, and bank savings accounts is a great way to manage such goals.

 If you are a more aggressive investor, you would consider a little equity allocation of 10-20% of the desired short-term goal value. A significant allocation, such as a 100% equity commitment for a short-term goal, is not advised.

Three to five years goals:

This time horizon is classified as short- to medium-term. To achieve such goals the investor can plan to allocate a part of their investment to equity and rest in a debt fund, at the knock of 3rd year an investor should start switching their portfolio from equity to debt this can be done at a go or this process can be more of a gradual, where the investor can design an STP and slowly shift the equity corpus to debt fund.

You can invest in a mix of short-term debt funds, hybrid funds, small caps, large and mid-cap funds. The ideal mix of the various asset classes would vary from investor to investor based on their risk appetite.

Five to seven years goals:

A diversified portfolio with a mix of different asset classes and market caps would be a better bet. Investors can also decide to include a smaller amount of debt to take advantage of the business cycle. Investors based on their risk appetite can design the portfolio matching their risk profile.

Another important point to consider is as the duration is long it would be wise to periodically rebalance the portfolio and adjust the same as per the market condition.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

Written by: CA Suraj Kar

To learn more, get our Journal: PW Insider for FREE!

For more information, reach us at [email protected]

Team, MyGoalMySip.

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    About Us

    MyGoalMySip is an Online Mutual fund investment platform powered by Prudent Wealth. As an investor, it might be hard to find the perfect investment opportunity; therefore, we’re here to help you make an informed decision.

    Our goal is to educate people and make them financially literate, and at the same time guide you in your investment journey, in short MyGoalMySip is your investment buddy.

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