Secure your financial freedom this Republic Day

On January 26, 2021, India will celebrate its 71st Republic Day, honouring the date on which the Indian constitution came into effect, turning India into an independent democratic republic. Just as the constitution lies at the heart of the Indian republic as its primary guiding light, a robust financial plan must also be at the heart of any path to true financial freedom.

Steps to financial freedom

1. ​Identify and prioritise goals - ​The first step towards financial freedom is to identify appropriate goals to better bucket your money. While many of us have several conflicting goals, it is important that we identify and prioritise them by segregating them into needs and wants; needs being essentials and taking precedence over wants, which are desires and aspirations. The next step is to align your needs/ wants with the appropriate time horizon. For instance, child care and daily expenses can be short-term goals, a child’s education expenses and a home down payment could be medium-term goals, while retirement and a child’s wedding expenses could be long-term goals. Next, it is important to calculate the approximate corpus one needs to attain these key milestones. While evaluating cost, it is important to consider factors such as your current age, income, family responsibilities and, most importantly, expected rate of inflation as Inflation decreases investors’ purchasing power over a period of time. Once the targets are clearly set, one can accordingly plan and stay focused.

2. Assess the risk and return profile - Goals may be largely the same across different life stages but what differs is the risk-bearing capacity and return expectations. Both are the most important parameters governing asset-allocation decisions. One can seek financial help and do risk profiling which will help to evaluate risk-taking ability. Based on the risk-taking ability, investors can be broadly classified into five profiles – conservativ​​e, moderately conservative, moderate, moderately aggressive and aggressive. Generally, short-term goals should have a conservative portfolio (largely liquid cash and short term debt avenues), medium-term goals - a moderate portfolio (mix of equity and debt) and long-term goals a more aggressive portfolio (largely equities). Next, when it comes to return expectations, it is essential to note that unlike traditional debt instruments, debt-oriented mutual funds offer market-linked returns and are subject to risk; when it comes to equities, it important to note that the asset is subjected to volatility in the short term but may be rewarding in the long term.

3. Budget your finances - Once you are aware of the goals (purpose) and done with risk-return profiling, it is crucial to budget your finances. This will involve an evaluation of the outstanding debt, your savings, a study of the current financial situation (inflow) and an analysis of regular spending (outflow). Budgeting your finances also includes making a provision for emergencies like medical expenses. Besides designing one, sticking to a budget is equally important. At times, you may be tempted to spend lavishly or there could be higher than anticipated expenses due to extraordinary situations like a pandemic over which we have no control. Such temporary hiccups are fine as long as you regularly track expenses and maintain a disciplined saving habit.
   

4. Asset allocation for your goals - In addition to budgeting and saving, wise allocation of savings is key to reaching your goals. For that, one needs to start investing early in life as an early start will provide more time and compounding benefits, leading to potential long-term wealth creation. Also, you should build a diversified portfolio by allocating money to different assets like equity, debt and cash, according to your risk profile. For asset allocation, it is essential to choose the right investment avenue which should ideally be a mix of the traditional and new such as different types of mutual funds. For instance, traditional avenues can provide safety of capital and guaranteed returns and can be a good option for short-term goals. For long-term goals where the objective is to attain better inflation-adjusted returns, it is prudent to invest in equities. Direct equity investments are not everyone’s cup of tea. In that case, it might be prudent to choose mutual funds.
   

   Besides equity funds, mutual funds as an investment product support goal-driven investing since they provide a variety of investment options across asset classes. For instance, conservative and moderately conservative investors can invest in a mix of liquid, overnight funds, ultra short-term and short-term funds. Moderate investors can consider hybrid funds while aggressive investors can opt for pure equity-oriented funds like large cap, mid and small cap or multi-cap.

5. Track and re-align to remain on path - Regular tracking and adjustments are essential since the market is volatile and dynamic. Adjustments in asset classes should be made in line with the market movement to help reap the maximum benefit. Further, the preference for asset classes varies across life stages based on the risk-return profile. For instance, one should ideally have higher allocation to equity when young, but gradually move toward debt as one approaches retirement. Re-assessment will help you weed out the underperformers and realign investments in line with your asset allocation and risk-return profile.

   
   

Finally, it is very important to avoid certain common pitfalls, namely:

Follow the steps above and stay patient, consistent and focused over the years and financial freedom can be yours.

Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are ad​vised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

An Investor Education and Awareness Initiative by SBI Mutual Fund

1. Investors should deal only with registered Mutual Funds, details of which can be verified on the SEBI website (https://www.sebi.gov.in) under ‘Intermediaries/Market Infrastructure Institutions’.​​​

2. ​Please refer to website of mutual funds for process for completing one-time KYC (Know Your Customer) including process for change in address, phone number, bank details etc.

3. Investors may lodge complaints on www.scores.gov.in against registered intermediaries if they are unsatisfied with their responses. SCORES facilitates you to lodge your complaint online with SEBI and subsequently view its status.

   
   

​Mutual Fund investments are subject to market risks, read all scheme related do​​cuments carefully.