You do not have to be wealthy to be an investor. Investing even a small amount can produce considerable rewards over the long-term, especially if you do it regularly. But you need to decide about how much you want to invest and where . To choose wisely, you need to know the investment options thoroughly and their relative risk exposures.

Investment planning is necessary for every one who wishes to achieve any financial goal. You have to plan your limited resources to avail the maximum benefit out of them. You should plan your investments to fulfill major needs like:

• Creating wealth over the long term

• Acquring assets like a dream house or a dream car

• Fulfulling your need for financial security

Thus, Investment Planning is nothing but a holistic approach to meet your life's goals.  

Choosing the Right Investment Options

The choice of the best investment options for you will depend on your personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for higher education expenses. In most cases, the right investment is a balance of three things: Liquidity, Safety and Return.

Liquidity - how accessible is your money?
How easily an investment can be converted to cash, since part of your invested money must be available to cover financial emergencies.

Safety - what is the risk involved?
The biggest risk is the risk of losing the money you have invested. Another equally important risk is that your investments will not provide enough growth or income to offset the impact of inflation, which could lead to a gradual increase in the cost of living. There are additional risks as well (like decline in economic growth). But the biggest risk of all is not investing at all.

Return - what can you expect to get back on your investment?
Investments are made for the purpose of generating returns. Safe investments often promise a specific, though limited return. Those that involve more risk offer the opportunity to make - or lose - a lot of money.

To a large extent, the choice of the right investment option will also depend upon your financial goals. For example, if you want to invest for funding your vacation next year, don't choose an investment vehicle that has a three-year lock-in. Similarly, if you want to invest for your daughter's marriage after 10 years, don't invest in 1yr bonds for the next 10 years. Instead, choose an option that matches your investment horizon.

Investment Strategies

Investment Strategies
You can make your own investment picking approach or adopt one after consulting financial experts or investment advisors. Whatever method you use, keep in mind the importance of diversification, or variety in your investment portfolio and the need for a strategy, or a plan, to guide your choices.

Investment approaches
The options you choose to put your money in, reflect the investment strategy you are using - whether you realize it or not. Most people adopt the following approaches:-

Conservative
These investors take only limited risk by concentrating on secure, fixed-income investments etc.

Moderate
Such Investors take moderate risk by investing in mutual funds, bonds, select bluechip equity shares etc.

Aggressive
These are investors who take major risk on investments in order to have high (above-average) returns like speculative or unpredictable equity shares, etc.

As a matter of fact, the investment approach of an investor is directly linked to his or her ability to shoulder risk. The ability to take risks depends largely on personal circumstances and factors like age, past experiences with investing, level of responsibility, etc.

Risk Vs Returns

Risk and returns go hand in hand. Higher the risk, higher is the possibility of earning a good return. Thus, it follows that all types of investment have some form of risk attached to it. Theoretically, even 'safe' investments (such as bank deposits) are not without some element of risk. Broadly, here are the various types of risks that you might have to face as an investor.

Credit Risk
The risk is that the issuer of the security will default, or not repay the principal amount. This is valid for corporate bonds etc.

Liquidity Risk
If you invest in securities, stocks, bonds, you are risking their sellability. In other words, your money gets stuck unnecessarily, creating an asset-liability mismatch.

Market Risk
Financial markets are volatile in nature. Volatility means sudden swings in value from high to low, or the reverse. The more volatile an investment is, the more profit or loss you can make, since there can be a big spread between what you paid and what you sell it for. But you also have to be prepared for the price to drop by the same amount. Those who invest in stocks and mutual funds typically run this risk.

Interest Rate Risk
Depending on the interest rate movement in the economy, the rates of interest investment instruments may go up or come down, resulting in a subsequent reverse movement of their prices. Such a scenario of economic instability might affect mutual funds etc.

The whole idea behind investment planning is to evaluate the risk associated with various types of investments and take steps so as to balance it with the desired return.

Investment Planning Steps

Investment Planning is the key to sucessful investing. It is a scientific process, which, if done in the right sprit, can help you acheive your financial goals. Here are the basic steps of Investment Planning

Step 1 : Identify your financial needs and goals
The starting point of a sound investment plan is to begin with a clear understanding of you financial needs and goals. Typically, any financial need or goal would translate into determining the tenure of your investment (investment horizon). All investment needs and goals can therefore be translated into short-term (less than 1 year), medium-term (more than 1 year) and long-term (more than 5 years). Here is an example of the financial goal of a typical household (a couple with two childrens).

Step 2 : Understanding investment choices
There are three basic investment categories: Equity, Debt and Cash. Any investment can be classified into one of these three categories, or asset classes. The key to investment success lies in understanding how each asset class performs over the various investment horizons, the choices within each category and the risks involved in making investment decisions in each of these choices.

Equity or Stocks are ownership shares investors buy in a corporation. When you make equity investments, you become part-owner (to the extent of your shareholding) of the company you have invested in. However, there is no particular rate of return indicated while investing. The current value of your holding is reflected in the price at which the stock/share is traded in the stock markets. Hence, these constitute a relatively riskier form of investment.

Debt instruments or Bonds are loans investors make to corporations or the government. They promise a fixed return at the time of making the investment. Also the promise of getting the money back is dependent on who is making the promise. In case of the Government, the promise will certainly get fulfilled, but if the issuer of debt is a company or an institution, the quality of the issuer needs to be adjudged, to ascertain its ability to keep the promise. Debt investments, therefore, provide you with the promise that your principal will be returned along with the interest payable thereon.

Cash includes money in bank savings accounts and other liquid investment options.

Step 3 : Decide an appropriate mix of various investment choices (Asset Allocation Plan)
Making an asset allocation plan is about determining the proportion of investments in each of the three basic asset classes. Essentially this depends upon your profile as an investor. Whatever stage of life you are at, you would need to invest part of your money for security and liquidity. A part of your investments should generate regular income and part of it should contribute to growth and capital appreciation. The proportion however, will vary based on individual goals, time horizons available to meet those goals and one's risk profile (the tolerance reaction to any down turn in the stock/debt markets). The key to investment success lies in determining the appropriate mix of the above mentioned categories and not just the individual investments that are done within each category.