Financial Resolutions For Mutual Fund Investors
The New Year always connotes new beginnings, ideas and opportunities. And not to forget, New Year resolutions – when people vow to lead a healthy lifestyle, work harder to fulfil their goals and make their lives – both personal and professional - more meaningful. How about making a difference as we herald 2016 into our lives – by making financial resolutions that not only focus on spending wisely or adding sources of income, but also foster a disciplined approach to wealth creation, over the longer run? (See Chart 1) The growing cost of living and economic uncertainty makes it a must for everyone to accumulate their savings and build a large corpus.
Curb your expenses
Money management is a crucial building block of a financially secure life. It requires you to track utilisation of funds and determine if your spending habits leave a sufficient balance to meet your long-term financial objectives. You would be astonished to see unnecessary expenses which can be ticked off the list.
Exercise goal-based investing
We often end up blindly following advice and investment strategies of close friends and relatives, seldom paying heed to our goals and risk tolerance levels. This is not recommended for the simple reason that your choice of asset classes should be driven by your risk profile, desired end-purpose of funds and time horizon. Seeking advice from a financial advisor could help you choose the right investment avenues, based on a questionnaire or detailed discussion.
Diversify across asset classes
Investors must unfailingly follow the principle of diversification. Spreading investments across different asset classes lowers one’s exposure to market volatility; these assets (for e.g. equities, debt etc.) do not move in the same direction and hence, loss incurred in one can be offset by gains posted by another. The diversification strategy should be based on the investor’s risk profile and financial goals. For e.g. short-term goals (child-care expenses, down payment towards purchase of house) require a conservative approach (debt), while medium-term goals (children’s education and aged parents’ care) and long-term goals (retirement and children’s marriages) would require moderate (balanced between equities and debt) and aggressive asset allocation (mostly equities), respectively. (See Chart 2)
Chart 2: Sample asset allocation
Adopt a disciplined approach for long-term wealth creation
Having a disciplined long-term perspective helps investors build a large investment corpus and meet all financial goals. Considering that investors are exposed to volatility in markets in the short to medium term, a long-term horizon would be more beneficial, especially in case of equities.
Investors can opt for a systematic investment plan (SIP) route to invest in equities, via mutual funds. SIPs help nullify the uncertainty around timing the market, reduce the risk of volatility and instill discipline. Over the long term, the rupee cost averaging would actually help you lower the average cost of investment
Don’t ignore tax planning
As you approach the end of a financial year, you start exploring tax-saving instruments, many-a-times in haste. You seldom look at whether these instruments actually match your risk-return profile. Products like
equity-linked saving schemes
(ELSS) can offer you benefits of wealth creation, apart from saving your tax outgo. Instead of waking up at the eleventh hour, you could invest in such schemes at the start of the new fiscal itself. Even within the gamut of popular tax-saving instruments, look beyond traditional options that fail to deliver superior inflation-adjusted returns. A comparison of the traditional tax saving instruments with an ELSS
fund reveals that the latter seeks greater exposure to equities and has potential to deliver superior inflation-adjusted returns over the longer run.
Regular portfolio review is essential
While having a robust financial plan is advantageous, it is not enough to reap rich dividends. For this purpose, investors must review their portfolio periodically (at least bi-annually or annually). This will help them restructured their portfolio, as per the changing market conditions. Investors should stay updated about events that can impact the underlying financial environment. A regular portfolio review will also bring asset allocation back to targeted levels and help eliminate non-performers.
Thus, these are few New Year resolutions that could help you build a large corpus or expand your existing kitty and meet your financial objectives faster.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. 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. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related document carefully.