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Start Small With an Eye on Your Financial Goal

Author: Viral Bhatt/Sunday, December 10, 2017/Categories: Cover Feature, Invest

Start Small With an Eye on Your Financial Goal

Decisions make a lot of difference in our lives. While right decisions at right time can chart a good future, wrong ones can screw things up. This holds true for our finances also. Those who intelligently plan their finances always have an edge over those who invest money in a haphazard manner and without any proper planning. But we also can’t ignore the fact that everybody learns from mistakes. To err is human, but learning from it and not repeating the mistake is what is expected of a mature investor. Maturity comes over time. To enhance your knowledge, it is important to understand the weaknesses and shortcomings which could help to rectify them. Let’s think about new year 2018, and how we should plan our investments? Where to invest? and How to invest?

Defensive Investor – Only Savings Account

Majority investors in India are from this category. When you say equity, they will look at you as if you were some aliens lecturing on technology. They never invested a single penny in equities. Their answer to equity is – equity is risky so why to take the risk. They are happy with what they are getting but not greatly enthused over returns.

Don’t keep idle money in your bank Account

By far, the most profitable type of deposit for a bank is what they term “idle deposits”. An idle deposit is money that an account holder leaves in their savings & current accounts, earning very little or no interest from them. The majority of that money is used in giving out short-term loans and the bank makes more money from the difference between the interest charged and the interest it pays (or doesn’t pay). Our bank account earns the sum of 4% interest on balances.

Many of us leave money lying around in savings & current accounts, getting almost nothing. However, we frequently complain about rising inflation eating up our savings. For these class of people, my advice would be:

Liquid Funds (Money Market Funds) are ideal as short-term investment options: As the name suggests, liquidity is the primary motto in these financial instruments. These offer slightly higher returns than savings accounts. Returns range from 5.5 to 9% based on the period and risk category. Liquid funds are fairly safe investments as they invest in fixed income securities of governments and corporates. Liquid funds are one of largest pie of mutual fund industry. If you have surplus money for 1-6 months, then consider investing in a liquid or liquid plus funds. It earns better interest than savings bank account balances. The withdrawal money is usually credited the very next day or maximum in two days.

How much I need to invest every month to achieve retirement Goal?

“Indians are great savers” is not the true anymore. Rather, we should say, “Indians were great savers”. New generation likes to enjoy the present & have no idea about the future. If you have just started to work & would like to have a very simple lifestyle & retire at the age of 60, you can do it with saving (read investing) 10% of your income. If you are planning for an early retirement, start with 20% savings.

Moderate Investor – Only Safe Investments

They will be the first to read or get information on an investment but will never participate in markets. They talk about personal finance but will not be ready to risk their own money. He is the non-playing captain who will never dare to sweat himself but would be the first one to talk about strategies. Start your investment planning with equity participation through Systematic Investment Plan (SIP). Some of the important features of SIP are-

 Light on the wallet: It is easier to build a long-term innings with singles than hitting 4s and 6s each time. It is convenient to save Rs1000 or Rs2000 every month than trying to save 1 lakh in one shot. SIP does not hurt and it gives long term benefit to investors.

Makes market timing irrelevant: If market lows give you jitters and make you wish you should have never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But, that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So, if stocks are such a great thing, why are so many investors complaining? It’s because they either got the stock wrong or the timing wrong. These problems can be solved through an SIP route in a mutual fund with a consistent track record.

Helps you build for the future: Most of us have needs that involve significant amounts of money, like child’s education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But, if you start saving a small amount every month/quarter through SIPs that is treated as sacred and is set aside for some purpose, then you have a far better chance of making that down payment on your house or getting your daughter married without drawing on your PF (provident fund).

 Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a mantra of finance called ‘compounding’. According to a study done by Principal Mutual Fund, a gap of 5years results in doubling of the investment corpus. Following are some of the best performing equity funds.

Aggressive Investor – Only Equity Investments

This is a rare breed. They have a long-term view over equity. They will never discuss small market events. They are also a bit mechanical in investing. They invest when they have a surplus and withdraw when in need. Aggressive investors are convinced that equity will beat all other asset class in long run period. Aggressive investors should allocate their money into equity as well as debt category. Some of the strategies to be used for these investors are like invest in dynamic or hybrid category of funds (balanced funds). They also can think of ETFs for passive investment strategy. You can also think of investing in some of the IPOs for long term gain.

Advice For the last one year, I have been receiving thousands of comments/queries on mutual fund schemes. I get a chance to learn new things when answering these queries. Let me share my observations and suggestions with you all.

Identify your Goals : Most of us identify the products first and then try to shortlist best investment avenues. An investor has to first identify his/her financial goals and then try to shortlist best available product options for them. This is applicable for mutual fund investments also.

Do Goal-wise planning & not as per your agewise planning: Even if you are a senior citizen, you can invest in equity funds if they are suitable to your investment objectives. Equity funds are for any type of investors.

Diversify across Fund categories & Fund houses: I often observe that investors invest in multiple funds of same fund houses. I suggest you to not only invest in funds offered by different fund houses but also try to pick funds from different fund categories.

Ignore Short-term volatility: It is understandable that an investor (especially new investors) may panic if he/she sees negative returns on his MF portfolio. If you have invested in equity oriented mutual funds for medium to long-term tenure, kindly stick to your investment objectives, and financial planning. It is advisable to ignore short-term volatility (if any). But do check and track the performances of your investment once in a year.

Consistency of the fund is the key parameter:

 A ‘good mutual fund scheme’ is the one that consistently manages to outperform its category returns and also its benchmarks. It is wise to be with the consistent performers for long-term goals instead of churning your portfolio based on star ratings or media news on recent performances of the funds.

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Kavita Giridhar Mallya

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