Humans have a common trait, i.e. “Emotions”. Most of our actions are driven by emotion, whether we know it or not. Emotions have a far greater impact on our decision-making than we think they have. Emotions sometimes impact us positively and sometimes not so positively. In the case of shopping, marketing campaigns decide most of the aspects related to shopping. When, what, where, how or how much we will buy are controlled by ad campaigns & offers.
Most discount offers are meant to lure & incite us to buy more and purchase things we actually don’t need. Surprisingly we all know that, but still we keep on doing it & be sorry about it later. This, according to me, happens due to fear of missing out on an opportunity which we might not get in future. Though we know it’s not true. Even the wisest of us have strong emotional drives which sometimes suppress our ability to take wiser decisions.
With time, we have developed a strong emotional desire to own any new thing or product that comes in the market. It happens because we think its latest and must have something better from the earlier product or version. Naya hai to behtar hai…Isn’t it?
We start following the same ideology with financial products too & that creates the problem in our financial life. We get attracted to newer products which are more complicated to understand and are not transparent. We must not confuse investing with shopping & get swayed away by new taglines & sales pitches. It’s only you who may help yourself, no company will help you. Zindagi ke saath bhi, zindagi ke baad bhi…
Your financial happiness doesn’t lie in any financial product, but it is in the way we deal with those products. Following these small steps would lead you to a happy financial journey.
Have a written Financial Goal Plan
Most investors plan in their mind, but a plan that is not written does not have any significance. Suppose you meet an architect and he draws a construction plan in his mind, does it have any relevance to you? or will he be able to build a magnificent building just by having a plan in his mind?. A student who has everything in his mind, but can not pen it down, will it help him to excel in exams?
We must write a plan for everything for which we want results to be in line with our expectations. Planning is like bringing the future to the present. You have to measure everything you need in future & also consider inflation while planning, then you will be able to achieve those milestones.
In the below image, you may see how the the retirement goal of the client has been planned. The retirement corpus after adjusting for inflation is Rs. 4.44 crore & Investor’s existing investments like EPF, mutual funds & other assets are Rs.68.64 lacs. After allocating the investor’s current investments to the retirement goal, we may see that 15% of the goal is achieved as of today.
Also in the above image you may see the shortfall in goal achievement & additional amount required to achieve the goal. Here if you want to achieve goal completely in future you may either choose to increase your monthly SIP by Rs. 22830 & Rs. 4125 (total: 26955) in equity & debt funds respectively. Alternatively you may invest lumsum amount of Rs. 1966460 & Rs. 493876 in equity & debt funds respectively.
In the below image you may see year wise possibility of achievement in percentage & progress of the retirement goal till the investor reaches 85 years of age. This will take investment projections of any regular investment being done regularly like mutual fund SIPs & will also consider growth assumptions in value of the all the assets in future.
Surely, investing is not like that adventure trip, where we sometimes don’t want to plan just to find pleasure in the little chaos of the trip. Creating goals will also define the time for which you may invest & will help you select the most suitable product for that particular time period.
Spend Wisely
Most people spend much more than what they should spend. It happens because they don’t know how much that additional money saved per month may become in future, if invested wisely. Even when they know it, they still can’t visualize the impact, as most of the time we do mental calculation rather than doing it formally by writing it down. Isn’t it true?
It doesn’t mean that we must not spend, but we must not compromise on our financial plan. This can only be done if we have a well written financial plan with us.
For example, if someone today is 30 years old and is spending additional Rs. 5000 or Rs. 10000 per month. If these additional expenses can be curtailed and the money is invested in mutual funds, than at the age of 60:
| Investment per month | Total investment till age 60 Years | Future value at age 60 years @12% |
| 5000 | 18 Lakhs | 1.54 Crores |
| 10000 | 36 Lakhs | 3.08 Crores |
"Beware of little expenses. A small leak will sink a great ship"
Benjamin Franklin
Be patient
Being patient is key to a successful financial plan. It is the single most important trait in an investor that decides the success or failure of an investor. We must be patient and let our investments remain in line with our financial plan.
Due to fear & greed, we keep on shifting our money from one product to another, ignoring our investment objectives. This behavior results in below average return from the investments & investors on the contrary thinks that problem is with the investment products. It’s like whenever a car hits another car from behind, the driver who is behind blames the driver ahead of him for hard braking. However, it is him who is at fault, as he didn’t keep a safe distance from another car.
Don’t invest in haste
Most investors are concerned more about availing tax rebate while investing, rather than the merits of the investment product. The situation gets worse when we think about tax savings in the last days of march every financial year. As by then we don’t have time to understand what are the pros & cons of various tax saving products & their suitability to your financial plan.
We ignore the importance of product because of the instant benefit or gratification we get by tax savings. Our focus gets shifted from selecting a better investment product to investing for just tax savings. We must remember that tax saving is just one time benefit & we must also look for the compounding potential of the investment along with tax efficiency in the long run.
Most of the tax savings products are long term and they have a major impact on our financial life. Let’s look at it with an example:
| Product | Investment Amount | Rate of return | Future Value after 15 years | Future value after 30 years |
| PPF | 1,50,000 | 7.10% | 4,20,000 | 11,74,000 |
| ELSS ( Mutual Fund) | 1,50,000 | 12% | 8,21,000 | 44,93,000 |
In the above table, the difference in future value is just of a single year’s investment. Just imagine what would be its impact, as we do investment every year. Next time don’t rush for investments & spare sometime to create a robust investment portfolio.
Diversify- Every asset class has volatility
Each ingredient is important while preparing a tasty food item. Nothing more and nothing less according to the cuisine we are preparing. Similarly all asset class are important & they must have a place in our portfolio as per our risk profile. We must follow a definite asset allocation and stick to it, regardless of the hype & noise.
In the above image, none of the asset class or investment category has delivered consistent top performance year-on-year. The category which was top performing in 2013 is worst performing in 2022. We must have a portfolio where risk-reward is managed well & volatility in the portfolio is as per investor’s risk profile. Even the rate of return on fixed return instruments changes regularly & is not constant.
Insurance means Insurance
‘Where do you invest?’ the most universal answer is ‘I have an Insurance Policy’. Insurance actually means protection from a financial loss, but still it is widely seen as an investment avenue. But why do we invest in insurance? It’s because of big marketing campaign on mass media, highest no of distributors, first mover advantage as LIC started in 1956. At that time there were not many investment options and whatever we were served we had no choice but to invest in them. With time, the investment universe has evolved with a lot many investment products with far more merits & flexibility. We continued to invest in insurance due to familiarity with the product & its acceptance in our friends & family.
Let’s compare two investments in the below table:
Suppose someone invests Rs. 5 lac annually in Insurance which has an inbuilt insurance cover of Rs. 50 lac & another person gets an cover of 50 lac in Rs. 15000 annually & invests remaining 4.85 lacs annually in mutual funds.
| Rs. 5 lacs invested annually in Insurance Plan (with an insurance cover of 50 lacs) | Rs. 4.85 lacs invested annually in Mutual Funds (Rs. 15000 is paid annually as premium for Term Life Plan with an insurance cover of Rs. 50 lakh) | |
| No. of Years | Insurance return @6% | Mutual Fund return @12% |
| 6 | 37 lakh | 44 lakhs |
| 12 | 89 lakh | 1.31 crore |
| 18 | 1.64 crore | 3.03 crore |
| 24 | 2.69 crore | 6.42 Crore |
| 30 | 4.19 crore | 13.11 Crore |
You may clearly see the difference in the future values of both the investments in various time periods. Choice of investment products & asset classes creates a lot of difference in the wealth created during our lifetime.
Insurance is essential and one must not ignore it, but we must opt for the insurance products wisely. We must get a regular term insurance plan with optimal insurance cover even before starting investments.
Nothing is Risk Free
Do you know of anything that does not involve risk?
Everything involves risk whether it is active or dormant. In simple words, risk is always there whether we know it or not. Like lighting a gas burner, crossing a road, driving a vehicle, walking on a road, climbing stairs, everything involves risk, but we don’t feel the risk, why?. That’s because we know how to control the risk in all those activities, and learnt to take benefit from these activities. Although, they might possess a threat to a child or an inexperienced person who doesn’t have the necessary knowledge to control the risk.
Investment options where there is visible volatility in price like stocks, real estate, gold etc are having an active risk component. Investors consider only these assets as riskier assets, although in the long term these assets perform better compared to any other asset class. Investment options where we don’t see any upfront volatility as principle is guaranteed are considered safe, like FD, PPF etc. However these investing option have a dormant or non visible risk, as these investment options in the long term are not able to outperform the inflation. These risks are not able to achieve your financial goals, not able to accumulate as much wealth that we could have through having a better combination of riskier and safer investment options.
"Successful investing is about managing risk, not avoiding it"
Benjamin Graham
Keep aside some cash
Always keep some cash in the form of a Liquid Fund in your portfolio. It can be redeemed any time and you may receive it in a day. The suggested amount to be kept is around your 6 month expenses, which will act as your emergency fund. It helps us in the time of crisis and we don’t have to withdraw funds from our long term assets.
Not having enough liquidity is one of the main reasons, which never let investors focus on their long -term financial goals. Investors frequently withdraw money which was invested with an aim to achieve their other important long-term goals like retirement, child education, child marriage, house purchase etc.
There are lot many things you may follow to get the best out of your investments, but these are important ones that will help you be on track towards achieving financial success. These steps will keep you less prone to emotional & behavioral traps & will make your financial journey worry free.
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