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3 ways to kickstart your financial plan

Last updated on: June 15, 2011 12:01 IST

3 ways to kickstart your financial plan

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Dhanashri Rane, Fundsupermart.co.in

Most of us at some point in our life have felt that we don't have enough money to make our dreams come true! This is expected and why not, as there are only two ways to earn money and they are:

  • You work hard and you get paid for it
  • You make your money work hard and you get paid in return

Now, how can you make your money work harder and get paid in return? Investing is a way of making your money work harder for you. Before, we get into discussing about investing you need to know yourself.

A much-learned man has said, 'The ability to ask the right question is more than half the battle of finding the answer'. Therefore, as an investor, your job is much easier as you only need to ask three fundamental questions, which are:

  • How much money do I need?
  • By when do I want this money?
  • How much downside am I willing to take to earn this money?

The first two questions talk about your gain. The third question talks about your ability to take some heartburn, as it is well known that, there can be no gain without some pain in this world.

Industry pundits have got jazzier terms for all the three fundamental questions.

  • How much money do I need? becomes future planning
  • By when do I want this money? becomes time horizon
  • How much downside am I willing to take to earn this money? becomes risk profile

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Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.

Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

 


Photographs: Dominic Xavier/Rediff.com
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Future planning

If you don't sit down and decide your exact financial goals, you will always be in a stressful state of 'needing more' and you won't know how much is enough.

So, the first thing you need to determine is how much you need to pay for all the expenses in your life (expenses can include -- buying a house, a new car, a foreign exotic holiday, your children's education fees or your day to day expenses), and how much you need to retire in a relatively comfortable state.

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Time horizon

The next step is to ask yourself: By when do I need this money?

The rule is this: the longer the time frame that you have for your investments, the more likely you are to make positive returns. Also, you can afford to take on more risks. If you are pressed to make a quick buck in a very short time, chances are you won't do very well. This is because markets are unpredictable. While it is true that over the long term, mutual funds have given great returns, in the short term, prices may fluctuate.

If you are caught with prices falling, and you do not have the luxury to wait it out, then you would have to sell at a loss.

Mutual funds are medium to long-term investment instruments. It makes use of the biggest ally of all long-term investors, and that is time. If you have time on your side, you can ride out any dips in market cycles and use those dips to your advantage.

So, at least some of your money should be invested for longer horizons or you should start early and hold your investments for long term.

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Risk profile

Different mutual funds have different levels of risk. There are those that are invested in 'fixed income' instruments, such as bonds, which are relatively low in risk, and have very little volatility. Then, there are those that are invested in 'growth sectors', which are stocks of companies in high growth industries. These mutual funds can be quite volatile and prices can rise and fall dramatically.

Of course, typically, the higher the risk of the fund, the higher potential returns it might deliver. So the more risk you are willing to take, the better your returns can be.

As the markets have breached 18,000 levels, retail investors have become wary and are wondering if a 2008 like scenario would emerge again. Investors should keep in mind that markets undergo cycles of upside and downside. 

More importantly, they should be aware of their risk appetite and work towards fulfilling their financial goals with careful asset allocation and timely portfolio review. A systematic way of investing will help override the fluctuations. Plus, the compounding effect of disciplined and regular investing (even Rs 100 every month) will reap more gains. Secondly, mutual funds offer a variety of options to invest in different asset classes, instruments and industries. Apart from fixed deposits, investors can look at fixed income funds to ensure reasonable diversification.

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Sit tight, hang on

After you have chosen the mutual fund and invested your money in it, simply sit tight on it.

There are several good reasons for this:

  • Cost savings. Every time you decide to sell a mutual fund and replace it with another, you incur additional costs -- exit load from the old fund, short term capital gains tax and so on.
  • Hard to catch the right timing. If you're buying and selling, it must mean that you are trying to time your investments, hoping to catch the momentum of each mutual fund. The truth is that it is very hard to catch market timing. Even if you can get 70% of your decisions right, the 30% of your wrong decisions can cost you all your earnings or more.
  • Earn potential returns. Don't decide to sell a fund only because it has gone up 20% or turned negative 10% within 6 months! You should sell a fund when its underlying valuation is high and buy a fund when its valuation is low. Therefore, even with a fund which has gone up 20% or fallen by 10%, if it's underlying valuation remains low the fund is likely to go up in the coming future.
  • Slow and steady wins the race. Let time be your ally. Sure, the temptation to sell a mutual fund after it has done 20% is great, but your best bet to a healthy financial future is to stay with it. Over the long term, it may only give you an annualised return of only 15% a year (some years it will give negative returns), but if you compound 15% over the number of years, you will see how big your investments can become!


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