Diwali, the festival of lights, is around the corner. It is the happiest holiday for most folks. And like every year, celebrations are marked by stunning fireworks, fanfare, and fervour with friends and family across the world. The ebullience on the streets, particularly in India, is so dazzling with oil lamps, lanterns, rangoli, fireworks, and shopping that it just can’t go unnoticed. Gifts and sweets are exchanged between family and friends during this five-day festival, and the mood is totally enthralling!
The mythological stories about Diwali vary regionally and between traditional cultures. Yet, all of them point to joy, celebrations, importance of knowledge, self-enquiry, self-improvement, knowing and seeking the right path. Predominantly, Diwali symbolises the victory of light over darkness; hope over despair; good over evil; and knowledge over ignorance.
Through this article, we want to shed some light on how you can brighten your financial future. Read on…
This Diwali, while you can continue to celebrate the festival practicing all the traditions, take a pledge to illuminate your financial wellbeing and safeguard your financial future. Invest wisely so your dreams/financial goals can come true. Even use the cash gift you receive this Diwali productively.
Often money is set aside, i.e. saved for the future consumption. But idle money or mere savings alone will not help you counter the inflation bug. You need to multiply your wealth; it needs to be deployed productively to earn respectable returns over inflation (also known as the real rate of returns).
Yes, you guessed it right: investments are a must!
However, doing ad-hoc investment may not be in your best interest in the long-term. A prudent approach to investing is:
- Recognising your own risk profile
- Each person’s risk tolerance/appetite is different. So, blindly aping another’s portfolio or investment style can prove perilous. You need to look inwards and make a prudent assessment. If volatility makes you nervous, then risky investments such as stocks and equity mutual funds may not be the ones for you. You might as well invest in fixed income instruments instead, such asfixed deposits, PPF, NSC, and so on. You see every asset class equity, debt, gold, and real estate and investment avenues have their risk traits. You need to recognise this risk level and ascertain if it suits you before investing your hard-earned money.
- Knowing you investment objectives
- What are your investment objectives: desire to grow wealth by taking high risk, preserve capital with low risk, or income generation. Setting an investment objective simply means ascertaining why you would like to invest. Every investment avenue will have either of these fundamental attributes: capital appreciation (growth), capital preservation (safety), or income generation; and when you select, recognising these is critical.
- Ideally, each of your investments should match your investment objectives. Plus, knowing the investment objectives helps in planning for financial goals with a suitable selection of investment instruments.
- Taking cognisance of your age
- When you are young, you can absorb higher risk and invest into riskier assets such as equity. But as age increases, our risk-taking capacity usually decreases. So, be mindful of your age.
- Being aware of the investment horizon
- This refers to considering the time period before you need money. Remember, the further the time horizon is for when you require your hard-earned money, the more risk you can take. And potentially, earn even more by investing in risky asset classes.
- Evaluating cost of investing
- Every investment has a cost thereto in the form of load, fees, expense ratio, demat charges, locker rent, etc. which needs to be taken into account while investing. And if you don’t consider the respective ones, the gains can be easily eroded. Very often many indulge in trading in the stock market to make a quick buck without really understanding the associated costs they are paying for regular trading or churning.
- Recognising the tax implication
- The post-tax returns on your portfolio need to be worthwhile. After all, the objective is also to earn tax-efficient returns. If you do not plan well, you may end up paying higher taxes on your returns.
Notwithstanding the above points, wise investing is also about disciplined investing. It should allow you to sleep better at night, and not worry if you’ve timed the markets well. And mind you, it’s not about “timing the market” but “time in the market”; as long as you have followed a systematic process-and-prudence-driven approach. As Paul Samuelson (a noted American economist) said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Systematic Investment Plans (SIPs) offered by mutual funds, like recurring deposits, enforce a disciplined approach towards investing and aids the regularity of investing. They are lighter on your wallet, make market timing irrelevant, help manage the integral volatility of the market, offer rupee-cost averaging, and power your portfolio with the benefit of compounding. SIPs along with recurring deposits are one of the effective mediums plan for your financial goals.
Don’t ignore diversification and asset allocation
Diversify, diversify, and diversify!! This is what you would have often heard while investing…and rightly so, as it is one of the basic tenets of investing. It helps to reduce the overall risk of your investment portfolio. But unless you diversify effectively, it’s meaningless and may not add value to the portfolio. Primarily, you need to ensure that the asset allocation is right, and then diversify within the asset classes equity, debt, gold, and real estate.
Asset allocation means parking certain proportion of your investible surplus in respective asset classes, such as equity, debt, gold, and so on based on your: age, income, assets, liabilities, investment horizon and risk appetite. This way it helps to keep a balance between risk and reward of any particular asset class by not placing all your eggs in one basket.
Hence, asset allocation is an investment strategy helping you define a roadmap for your investment portfolio.
Here are 5 key benefits that accrue with astute diversification and asset allocation:
- Optimises portfolio returns;
- Minimises portfolio risk;
- Aligns investments as per time horizon;
- Makes market timing irrelevant; and
- Maintains liquidity of the portfolio
Here a few more vital points to remember while investing:
- Do not rush with investing; undertake thoughtful research, know the investment product well, and adopt a holistic approach
- Do not speculate. It can be hazardous to your wealth and health
- Never invest with borrowed funds, except in case of real estate where you can opt for a home loan at an attractive interest rate
- Never use contingency funds put aside as part of your savings to meet requirement on a rainy day, i.e. in case of exigencies
- Avoid investing without a plan in place or there are chances you may go off the course
- Select an investment adviser who can put forth your interest before his/her own
After you’ve read this article, it’s possible that you may take a pledge to invest wisely to create wealth and give the best to our family, so don’t procrastinate start now! With any investing, it is the early bird that gets the (bigger) worm.
And remember the old adage: "Rome wasn't built in a day". While you desire to become wealthy by the day, it is important to note that wealth creation is a "journey"; involving process, prudence, and patience. Having followed a prudent approach, give your investments time to grow.
Nevertheless, don’t get married to your investments. Track and review your investment portfolio at least once in 6 months to take corrective measures. It need not be done every day or every week if you have adopted enough prudence while investing. With regular monitoring and review of your portfolio, you can timely know if and where you are going wrong, and when a call to action is warranted. You can employ timely corrective measures, so that your investments are well-aligned to accomplish the envisioned financial goals.
Axis Bank’s integrated wealth management services, ‘Burgundy’ offers an end to end wealth management experience that is tailor made to suit your long term financial needs. Your Burgundy Relationship Manager along with his team of investment counsellors will meticulously analyse your assets and portfolio in view of prevalent market conditions and recommend investment solutions that help optimize your wealth creation. Get started today!
Wish you a bright financial future.
Happy Diwali, Happy Investing!
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