Come New Year and all of us think of resolutions personal as well as professional albeit few are fulfilled over the year.So how about some financial resolutions as well It is not typical but could be helpful.
source: Times of India, Chennai 1/1/2013
A financial resolution would not entail just reducing wasteful expenditure or increasing the bank balance,but it would help manage ones finances in a more disciplined manner. The adage if you fail to plan,you plan to fail holds good here. So, for 2013, here are some resolutions that investors could look at but they should be in sync with their investment objectives, risk-taking appetite and the time available.
It is very important for an investor to understand his/her risk profile and investment objectives before making an investment.For instance,a young investor with lesser responsibilities generally has an aggressive risk profile and long-term investment objective and, hence, should have a higher exposure to risky investments such as equity and gold. On the other hand, a senior citizen should have exposure to safer investments.
Investors should put their eggs (read money) in different baskets (asset classes).Diversification makes investments less prone to market volatility as risk gets spread across various asset classes. Also, all asset classes equity,debt,gold,etc do not move in the same direction at a given point of time,so the loss in one asset class is covered by profits from others. Investment should be allocated across asset classes, keeping in mind the investors risk profile and investment objectives as already explained.
Invest for the long term:
To build substantial wealth and to achieve all the financial goals,a disciplined long-term investment perspective is imperative.This is because most asset classes are volatile in the short to medium term.Hence, it is important for investors to look at long-term investments. Further, a disciplined approach is needed. Investors taking the equity route for wealth creation can benefit by investing through systematic investment plans (SIPs) offered by mutual funds. SIPs help in negating the need to time the market, reduce the risk of volatility and inculcate the habit of disciplined saving. Further, it not only offers the benefit of rupee-cost averaging (buying more when markets are low and less when markets are high) but also eases cash outflows. For instance, if one would have done a SIP of Rs.1,000 per month for 10 years in S&P CNX Nifty, he/she would have earned compounded annualised returns of nearly 15% till December 14,2012.
Tax planning is through the year:
It is common practice to make tax saving investment decisions closer to March. However,such decisions often go wrong if not well thought out.Hence,it is imperative to invest across the financial year and start from April. Equity linked savings schemes (ELSS) offered by mutual funds are among the best tax saving options with a three year lock-in period. The newly launched Rajiv Gandhi Equity Savings Scheme (RGESS) is also a good medium for tax savings by retail investors.
Regular portfolio review:
Though a robust financial plan is a must,its periodic review is equally important (at least once in six or twelve months). This is because market conditions keep changing,making it necessary to make adjustments in asset classes and underperforming investments to reap maximum benefits. For this purpose, investors should keep themselves updated about recent events which can impact the underlying asset class. For instance in the debt category,a declining interest rate scenario benefits long term debt funds more; short term debt funds,on the other hand, derive greater benefits in an increasing interest rate scenario.
Investors who put in place well thought out New Year investment resolutions and sticks to them diligently, stand a good chance of riding the financial cycles successfully and generating wealth in the long term.
The author is director, funds & fixed income research, Crisil Research
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