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Posts Tagged ‘#Financialgoals’

vector infographic car road timeline with pointers

 

As the media and dailies flash all the news and noise around the downgrade of debt securities of some of the IL&FS group companies and the ‘so called blood bath’ on the dalal street triggered by the sale of certain DHFL bonds, the average investor is obviously concerned about their investments. Spooked by these recent events and the volatility of both equity and debt markets investors are now wondering whether to continue their SIPs in mutual funds, buy stocks or just exit and hold cash? So what should you do?

There is no one size fits all solution to this problem. The answer lies in your long and short term objectives and whether you have a detailed drawn out financial plan. Situations like these (market volatility and uncertainty) truly highlight the need of a good weapon – your financial plan- your investment road map. When investors invest without a goal and financial plan in sight they do not know how much to invest, how long they should continue their investments and how close they are to their goals; thus how much volatility their portfolio can withstand.

 

Should you turn conservative?

Let’s assume that you have been been saving for the last 8 years for your child’s higher education and you have about 3 years left until you need the money. Now irrespective of whether the market is volatile or not, it is imperative that you re-balance your portfolio by moving your money in to conservative debt investments. This strategy should anyways have been a part of the financial plan to protect the corpus from short term market fluctuations and should be used only when you start approaching your goal.

If applied sooner than needed then you may run into the risk of falling short of the target amount. Also remember, getting closer to your goal is not the time to get speculative and increase your aggressive equity exposure.

 

How to deal with the amygdala hijack (the emotions and the panic)?

Turning conservative in tough market conditions is easy, staying focused on your goals and continuing your investments as you see the market giants come crashing down requires a lot of courage, focus and some science, data and rationale. Investors are believed to be irrational when it comes to dealing with money. When the markets are rallying investors want to be a part of it and they willingly invest. However as soon as they experience turbulence they drop their investments like hot potatoes in fact hurting their investments and networth. Market fluctuations affects a part of your brain called amygdala which induces fear. The fear leads to panic and the sell off frenzy begins.

At this point you have to go back to your financial plan and remind yourself what your goals are and follow your financial plan to avoid any knee jerk reaction. If your next milestone is 8-10 years away then the current volatility does not need you to act and also your portfolio can withstand this short term fluctuations.

 

How following your financial plan helps?

Staying on track with your financial plan and road map pays off in more than one way. Once you know your milestones and risk appetite through your plan:

  • You avoid taking unnecessary exits thereby saving unnecessary capital gain tax or any exit loads that may be applicable that could further reduce your profits.Money saved is money earned.
  • You stay invested (example SIPs) through a down cycle of the market , which actually helps you get a better value for your money invested. This over the long term can improve your portfolio returns and catapult corpus generation.
  • You may even get opportunities to start newer investments in good quality companies basis your risk profile and time horizon

An example to detail this : Sep 2008 is a period set in time; this is when the infamous Lehman brother crisis shook the global financial markets and sent the indices in India and across the world in a massive tailspin. It was a difficult time for investors, however the ones who persevered and continued their Sips reaped the benefits later.

Lets assume you had a plan and understood the corpus that you needed say in 2018 and started a simple SIP in a mutual fund. The chart below shows the trajectory of such an SIP of Rs 10,000 started in Oct 2008 in 3 different categories of funds.

SIP

SIP amount Total Amount invested in 10 yrs Current Value (Rs.) CAGR
Value Fund 10,000 12 lakhs 34.18 lakhs 18.26%
Multi Cap Fund 10,000 12 lakhs 28.80 lakhs 15.53%
Large Cap Fund 10,000 12 lakhs 28.43 lakhs 15.33%
Nifty 100 10,000 12 lakhs 25.98 lakhs 13.86%

 

Remember, in volatile times, people lose more money by fearing and holding back their investments and possibly denying themselves good opportunities that may present themselves in the form of a market downturn.

Markets will fluctuate and will be volatile, that is their inherent quality. Navigating these carefully is necessary for investors. A sound financial plan and the guidance of an independent and unbiased financial planner would help. In short, you need to stay on track and to follow your financial plan. This financial plan will be your guide and navigator during volatile markets.

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bonus 4

Anxious times lie ahead for employees across India as the season for the annual bonus starts in full swing. People often consider bonuses as “money found” rather than “money gained” and therefore almost always consider using these pots of income for discretionary expenses such as gadgets and treats and vacations. While there’s nothing wrong in indulging oneself, it is also equally important to have the big financial picture in mind.

And whilst the list of to-do items can be endless, we at Plan Ahead Wealth Advisors have distilled that list into a few essential options.

  1. Payoff those Debts: As crucial as it can get, reducing those crushing debts can go a long way to ensuring long term financial happiness. With that thought in mind, one should ideally those pay the ballooning credit card and personal loans which have very high interest cost. This could be followed by any car or educational loans, though do remember that an educational Loan has certain tax benefits. If nothing else, prepaying your home loan should also be considered though the pros and cons of prepaying the loan might be best arrived at after consulting with a registered investment advisor.
  1. Replenish Emergency Funds: Keeping funds aside for unforeseen events is a handy tool. And ensuring that tool is always at optimal levels is critical. Therefore, if you had dipped in those funds previously, the bonus is a good opportunity to return them to their originally intended levels. Ideally, anywhere between 3-6 months of expenses, including any EMI or insurance premiums, should be available in such funds.
  1. Revisit your Insurance Needs: Speaking of insurance premiums, it is common knowledge that with age, insurance requirements change. Chances are high that as you age, your health insurance premium might be bumped up or that you realize that your life cover is inadequate and needs an increase. Using your bonus for such needs is a prudent way to utilize the same.
  1. Pay attention to your unfunded Financial Goals: There may be certain milestones that may not have been attended to by you earlier. Some may be upcoming in the next year, while others could be years away. Earning a bonus is always a great time to re look at those goals and use the bonus to bridge any gaps that may be there to fund such items. This could also be, but not limited to, ensuring adequate investments into tax saving instruments as appropriate.
  1. Invest in yourself: They say the biggest asset anyone can have is himself/herself. Therefore, using the bonus to upgrade your skills/knowledge can be a rewarding decision for the future either by increasing your prospects for that next big professional leap or even increasing your earning capabilities.

While the above are some of the “to-do” items with bonuses, there are also certain “do nots” that one should look out for, such as:

  1. Although quite common, never over spend beforehand, especially with credit cards, with the assumption that you will receive adequate bonuses in time to cover for the same.
  1. Money in savings accounts usually vanishes quicker than one expects. So, don’t wait too long on deciding what to do with that bonus. You may find out that by the time you decide what to do with it, it has already been spent somewhere unknowingly.

Bonuses are the result of your hard work throughout the year, so ensuring that your bonus works as hard as you have, can go a long way to a financially secure future. By considering the items listed above, you are more likely to arrive at the right choice of what to do with your bonus. And if you are still confused, it is always advisable to bring on board professional advice to ensure that you are on the correct path.

 

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