Stock markets are tumbling, there is economic slowdown. The morning headlines are all about the gloom and doom stories. In the past few days, the government announced a slew of measures to prop up the economy. Market participants were buoyed after finance minister Nirmala Sitharaman rolled back the surcharge on foreign portfolio investors (FPIs) and domestic investors. In what was touted as 'mini-budget' , the government announced upfront capital infusion of Rs 70,000 crore into public sector banks, eased credit flow to NBFCs and pushed for faster transmission of rate cut to borrowers. After the initial euphoria, there seems to be pessimism again in market participants. But volatility in stock markets should not be seen as an adversity, but should be treated as a best friend. Investors should know that it is during market corrections that they get an opportunity to invest at better valuations. Market volatility should not dictate our emotions. Treat panic and anxiety as plague. Remember the most important philosophy in life should be 'Zindagi migzara' (life goes on -- Khaled Hosseini's famous line in The Kite Runner) and 'This too shall pass'.
If life is a journey, we should first fix our destination and then plan our travel accordingly. Similarly, we should decide our financial destination and plan our journey accordingly. The question uppermost should be -- 'What do we want to accomplish with our earnings?' We should decide what we want to achieve with our money and then work diligently towards achieving it.
Our financial goals need to be SMART -- Specific, Measurable, Achievable, Relevant and Time bound.
Some examples of SMART financial goals are:
Goal 1: To accumulate Rs 10 lakh by 2025 for my son’s college education.
Goal 2: To achieve a monthly income of Rs 50,000 when I retire in 2019.
Goal 3: To keep ready my PF accumulation of Rs 25 lakh for my daughter’s wedding in 2019.
When volatility strikes
Our investment decisions should be based on tangible goals, but not based on prevailing interest rates and stock market conditions. These factors are dynamic in today’s globalized world and therefore not in our control. What is in our control is our earnings, our savings and our borrowing decisions. We can set out to achieve something tangible to suit our family situation rather than trying to outdo our peers’ investment return or trying to win in the stock market.
How do financial goals help?
‘Where to invest our money?’ This question has been uppermost among the investors mind, especially with negative news and recent performance of different assets. But once you define your financial goals, the answer to 'where to invest money' becomes easier. Our financial objectives derived from our financial goals will help us make the right decision. For example, the objectives for the above goals would be ....
Goal 1: Capital appreciation over the next 7 years
Goal 2: Income generation over my retired life
Goal 3: Capital preservation for a few months.
From the above objectives, the investment product or vehicle becomes reasonably clear. While equity based investments could be a good choice for Goal 1 given the longer investment horizon and need for capital appreciation, it is totally unsuitable for the other two goals given its volatility. An investment that churns out a reasonably predicable return is what would suit Goal 2 as regular income is what most desire. Bank/postal deposits or conservative hybrid equity funds could be the answer. In the case of Goal 3, no risk can be taken with the principal as capital preservation is the key and not return generation. Parking it in short-term deposits or liquid mutual funds could be the best option apart from leaving it in your savings bank account.
Building a financial future requires proper planning with foresight and clarity. Clearly defined financial goals would go a long way in achieving the best result from your earnings. Goal based investing makes your financial journey more meaningful. In case this seems a daunting task, do not hesitate to take professional guidance. I tune into Bobby Mcferrin's 'Don't worry, be happy now' to whistle away my blues and croon the line from the song, "In every life we have some trouble, but when you worry you make it double." 'Don't worry, be happy now'. I sum up it with Mark Twain's line, 'Worrying is like a debt that you don't owe.' (The author is head of Money Mantra, a Mumbai-based financial advisory firm. He can be reached at email@example.com)