Not having a serious relook at your financial goals and your investment portfolio at this stage may prove to be a costly mistake.
With the economy slowing down and many investment products failing to meet investors’ return expectations, it’s normal for the common people to feel unsure about the market. This could be a cyclical economic phase or may be a temporary financial anomaly, but not having a serious relook at your financial goals and your investment portfolio at this stage may prove to be a costly mistake. So, what should you do to ensure you meet your short and long-term financial goals? We’ve discussed some steps.
1. Invest in instalments
Investors may find it risky to invest when the market is volatile. Suppose you invest a lump sum amount, say Rs 1.2 lakh, in a mutual fund scheme at a NAV of Rs 100 and the market falls thereafter — this may negatively impact your entire investment corpus. So, the best way to invest during uncertain market conditions is by fragmenting the corpus and investing in instalments. For example, you may invest Rs 1.2 lakh in a liquid fund and start a Systematic Withdrawal Plan (SWP) to invest Rs 10,000 for the next 12 months. This will allow you to get the benefit of rupee cost averaging and minimise the impact of market volatility as your investment is spread over 12 months.
In fact, you’ll be well-advised to go for the Systematic Investment Plan (SIP) route for all high-risk investments such as shares and mutual funds in various categories. However, make sure your choice of investment instruments is aligned with your financial goals and your risk appetite. Also, you may find investing in instalments more helpful in meeting long-term financial goals.
2. Stay adequately insured
Whether the market is stable or not, you may face severe financial challenges if you are not ready to face unforeseen risks like an accident, hospitalisation, etc. The only way to stay financially protected from such risks is by getting an appropriate insurance cover. For example, for health-related risks, consider taking a comprehensive health insurance plan with an adequate coverage amount for yourself and your dependent family members. Similarly, you must get a life insurance cover to ensure your family doesn’t suffer financially after your demise.
Income Tax Refund Status 2019-20: How to check IT refund status online in 5 minutes!
Hospitalisation costs can easily ruin your financial goals in the absence of a health insurance policy. Similarly, your untimely death can put your family at severe financial risk if you don’t have an adequate life insurance cover. Therefore, you can protect your financial goals by being regular with your premium payments for essential insurance policies.
3. Maintain adequate liquidity and emergency fund
You may need immediate funds during uncertain market conditions. People often make rash financial decisions under adverse circumstances which may disturb their financial goals and deteriorate things further. However, if you maintain an emergency fund with sufficient liquidity, it can help you avoid financial distress during trying times. While adequate may mean different things to different people, it’s generally advised that an emergency fund should be able to meet your daily expenses for at least 6-9 months.
You can keep your emergency fund invested in a high-interest savings account, in a fixed deposit or a liquid fund to ensure you earn a return that can exceed the prevailing inflation rate. Also, parking your emergency fund in an FD or a liquid fund doesn’t impact the accessibility to your money as these could be easily liquidated without losing much while tackling a critical situation.
4. Re-assess your goals
Your financial goals should be chalked out in such a way that there’s some room for adaptability if the situation changes from the time when you’ve set those goals. For example, let’s suppose you set the goal to purchase a home after 5 years in Bangalore and the property rate during goal-setting was Rs. 5,000/sq ft. You had assumed (and planned for) that the rate would increase to Rs.7000/sq ft when you’ll get ready to purchase the property. However, due to multiple reasons, the rate after 5 years has gone up to Rs. 8500/sq ft.
So, if your income doesn’t allow you to increase the size of your financial goal, then look to make some adjustments. You may want to buy a house on the outskirts of the city or go for a smaller house depending on feasibility to find a property within your budget. As such, re-assessing your financial goals can help you to maintain the right balance between key short and long-term goals. The size of your financial goals should be updated from time to time to make them more realistic.
5. Stay low on debt
When you are unsure about the market, it’s better to stay low on debt instead of taking the leverage. If the situation worsens, you may find it challenging to repay the debt — something that can easily spoil your financial goals. Gradually, as you become sure that the market is stable, you can take the help of debt to leverage your finances to achieve your major financial goals on time.
In conclusion, while setting detailed financial goals and laying out your investment strategies accordingly is crucial to achieving financial freedom, it’s equally important to take measures to fortify your goals. A farsighted approach, pragmatic planning and financial discipline will surely help you in this regard.
(The author is CEO, BankBazaar.com)