Avoid Random Investing
Ask these four questions before you invest Dr. Balaji Rao DG
PhD in Mutual Funds & Personal Finance
Dr. Balaji Rao DG is a SEBI-NISM empanelled financial educator with 39 years of experience, including 25 years in BFSI and 14 years in training and academics. He holds B.Com., MBA, a PGDMM, PGDFA and a PhD in Mutual Funds and Personal Finance. He has delivered 800+ investor awareness and distributor training programs across India.
Dr. Balaji has been associated with leading institutions as a trainer-speaker, including HDFC Mutual Fund, Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Find and Canara HSBC Life Insurance. He is the co-founder & Director of Finatoniq Ventures Pvt. Ltd. He is also the author of 12 books (10 in English & 2 in Kannada) and a former columnist with The Hindu, currently writing a regular weekly column for VK Money (Vijaya Karnataka). Widely featured across TV, radio and print media, his mission is to simplify financial literacy and transform individuals from investors into successful investors.
Saving is a habit. Saving is a practice. Saving is a tradition. Even squirrels store nuts in anticipation of harsh winters. Similarly, most individuals save and invest in one form or another to prepare themselves for their future. Yet, surprisingly few begin their investment journey by defining the purpose of investing.
Many investors focus on maximising returns, earning the highest possible profits, or making money in the shortest possible time. But is investing merely about generating returns, or is there a larger purpose?
Before making any investment, every individual should ask four fundamental questions:
Why should I invest?
Where should I invest?
When should I invest?
How should I invest?
The answers to these four questions lay the foundation for successful investing. The first, and perhaps the most important, question is: Why should I invest? While earning returns is undoubtedly an objective, investing should ultimately help us achieve meaningful financial goals. The concept of a provident fund or pension fund was never designed to generate profits. Its true purpose is to help individuals build financial independence when they stop earning. This is where goal-based investing begins. The most important financial goal for almost everyone is retirement. One day, our salary will stop, but our expenses will continue. Building a retirement corpus is therefore not an option - it is a necessity.
Another equally important goal is funding children's higher education.
Educational expenses have been rising at a pace far exceeding general inflation. Annual fee increases of over 10% have become common across many educational institutions. Today, a four-year engineering programme under the management quota in a reputed institution can cost between ₹20 lakh and ₹25 lakh. A three-year commerce degree followed by a two-year management programme can easily cost ₹16 lakh to ₹20 lakh. Medical education and overseas studies require substantially larger sums.
Without proper planning, many parents are forced to depend on education loans or liquidate long-term assets when the time arrives. Investing with the specific objective of funding higher education answers the question: Why should I invest?
Random investing may occasionally create wealth, but goal-based investing creates certainty and direction. Estimating future financial goals is not difficult. We simply begin with today's cost and adjust it for expected inflation over the investment period.
For example, consider a couple aged 40 whose current monthly household expenses are ₹50,000. By the time they retire twenty years later, they may require a retirement corpus of approximately ₹7 crore to ₹8 crore to maintain their lifestyle.
Similarly, parents with a three-year-old child may find that a postgraduate education fifteen years later could cost between ₹85 lakh and ₹90 lakh. For two children, the requirement could exceed ₹1.75 crore. These numbers may appear daunting, but they also highlight the importance of starting early and investing with purpose.
Every individual should list their financial goals - from the nearest objective to the farthest - and estimate the amount required for each. This simple exercise transforms investing from a random activity into a structured financial journey.
A qualified financial advisor can help estimate future costs, prioritise goals and build an appropriate investment strategy.
Everyone is an investor, but only a few become prudent investors. The difference lies not in the products they buy but in their clarity of purpose. Prudent investors always know why they are investing.
In the next article, we shall explore the second question: Where should you invest?