The
New Year is here and with that is the arrival of several New Year resolutions
which usually revolve around health and personal growth, maybe it’s time we
add healthy financial practices to the list too.
The
world is becoming even more geo-politically volatile which has in turn resulted
in rising living costs, job uncertainty and the ever increasing need to have a
safety net.
Let’s
look at some healthy and safety practices you should ideally adhere to from
this year onwards.
Plan for your Retirement
Pick
out any business related newspaper or website in the month of February or March
of each year and the words ‘’Tax Season’’ will be mentioned without fail
several times.
This
is sadly a testament to a larger issue of poor planning on the part of
investors when it comes to their taxes. Planning is not restricted to any
season, in fact no matter when you begin you will always be late but the
earlier you start, the better.
Another
issue this mindset of making tax saving investments at the last moment is that
it welcomes a sense of panic that could be avoided. Never underestimate the
frailties of human behavior under stress, a student under-prepared would use
the calculator to cross check what is 4 plus 3 because that’s just how pressure
works.
Under
stress and a strict deadline, investors often tend to take the wrong call for
the fear of missing out on saving taxes for the current financial year.
With
regards to tax saving (ELSS) mutual funds, these wrong decisions could include:
- Wrong choice of elss fund
- Over Diversification
- Making Lump Sum investments
- Not attaching tax saving fund to a goal
The
solution to get over these manifold issues is to:
- Start tax planning on 1st April of the financial year and not 31st March.
- Move on from tax saving mindset to tax planning mindset.
How to save for a
retirement fund?
Start early
The earlier you start investing, the better it is.
There are many advantages to starting early.
The earlier you start, you have a longer time horizon to
achieve your goal.
This also means you can begin with a small amount and
compounding has a much bigger impact.
The above table clearly shows that delaying your investment
by merely 5 years almost halves your final amount.
This is the cost you pay for delaying your investment.
Remember, you cannot outpace or recover time.
Do not be bogged down by the big numbers initially, start
early and stay disciplined.
Have a plan
This seems like such a basic rule to follow but sadly the
reality is quite different.
Having a plan would involve various factors from your personal
financial situation, flow of income to an emergency fund in place.
Not adhering to one can have a negative effect to a point from
which it would be quite exhausting to recover from in every sense and not just
financially.
Imagine having to dip into your retirement corpus because
you did not plan for an emergency fund beforehand.
Or you were not disciplined enough that you could not resist
from making an impulsive purchase that has an adverse effect on your retirement.
All other factors like the choice of mutual fund schemes,
their performance, etc. becomes secondary.
Have
adequate insurance
Make sure to have adequate health and term insurance.
Term insurance is all the more important if you have financial
dependents.
Most of us are only one health crisis away from having our
finances disturbed to the core.
Do not underestimate how hefty hospital bills can accumulate up
to.
Do not be merely dependent on your emergency fund to get you out
of trouble, that should be kept separate.
Avoid falling in to the trap of ULIPs and other low yielding
instruments that on paper claim to provide a mix of both investment and
insurance but in reality struggle to provide either of those in sufficient
terms.
Always keep your insurance and investments apart, they both serve
different purposes and should not be mixed.
Lemon and milk both have their benefits but we never mix them.
Do
not Trade with your Investments
The belief that one should be invested in the equity markets as long as possible is a tale as old as time and yet it is very rarely followed.
Let’s look at data to back this claim, according to a study by
Axis Mutual Fund 48.70% of equity investors redeem their portfolio within 2
years or less.
So much for long term investments !
A major cause of such behavior is the inability to stay inactive
and keep your ears shut from unnecessary noise.
Far too often retail investors are influenced by friends, family,
relatives, colleagues, social media, etc.
This is precisely why it’s not surprising to hear investors
redeeming at a high assuming the markets are going to crash while
simultaneously deciding to stay out when the markets are volatile assuming the
markets to go even lower.
We are living in an era of easy dissemination of information, this
is often misinterpreted as knowledge.
No one can predict the markets, not even YOU !
The easiest solution to such a problem would be to resort to goal
based investing but despite that if you can be easily influenced by
non-qualified professionals then there’s not much hope.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com