Sunil Kumar is an accountant working for a foreign company in Abu Dhabi, earning over Rs 2 lakh per month. At 45 years old, he was worried about losing his job when COVID-19 first hit in 2020. Contrary to his fears, he received a promotion and a raise.
As the market rebounded from the 2020 crash, Sunil Kumar started thinking about securing his future investments. Inspired by the "Freedom @ 40" campaign, he quickly opened a demat account and began investing in the "best" stocks recommended by social media and friends, as well as mutual funds. Upon reviewing the detailed investment statement sent by NSDL, it was clear Sunil had invested in more than 50 stocks and 28 mutual funds.
After a partial withdrawal when the market performed well, his portfolio value shrank from around Rs 50 lakh to Rs 20 lakh. Feeling more confident with his job security and salary increase, Sunil began living more lavishly. After five years, he started thinking about settling down in India and revisited his investment plans.
He realized he wasn't sure how much he would need for retirement and his children's education. Like many others, Sunil had invested without setting clear financial goals. Despite market fluctuations, the economy is on an upward trajectory, promising better returns from equity-based schemes.
Investors should focus on long-term gains in the stock market, investing systematically for potential future profits. Although some hesitate to invest in stocks due to high market values, long-term investors should remain unfazed. The stock market isn't a one-way path; it experiences corrections.
However, the long-term trend is typically upward, rewarding persistent investors during market corrections. Good planning minimizes risk and maximizes profit. Investors should have a clear plan to guide their investments.
Financial goals act as milestones, helping investors navigate uncertainties and stay focused on their objectives. Without clear financial goals and planning, investors often panic during market uncertainties. Proper planning aligns investments with long-term goals, reducing the fear of loss.
Financial goals guide investment decisions, ensuring that market conditions don't dictate actions. Effective financial planning starts with identifying goals like buying a house, funding children's education, and saving for retirement. Prioritizing these goals helps maintain focus on what's important.
For example, saving for retirement should take precedence over buying luxury items or vacations. Different goals require different timelines, so separate portfolios should be created. For example, building a house might take 3-5 years, children's education might take 10-15 years, and retirement might be 30-35 years away.
Investments should be diversified across various assets based on the timeframe. Regularly reviewing investment growth ensures alignment with financial goals. Adjusting investment amounts and portfolios as needed helps stay on track.
For long-term goals, equity-based schemes often provide the best returns, surpassing inflation. The risk profile determines whether to invest directly in stocks or through mutual funds. For short- and medium-term goals, debt-based schemes offer stability.
Bank fixed deposits, post office schemes, and debentures preserve capital with lower volatility. Once the goals are set and prioritized, the next step is to determine the investment needed to achieve them. Calculate the total amount required in the future, adjusting for inflation to meet the specified targets.
For instance, if a son's education costs Rs 15 lakh today, with an annual inflation rate of 7%, this amount will rise to Rs 62 lakh in 21 years. Assuming an annual return of at least 12% from equity mutual funds, you would need to invest Rs 5,500 per month to reach this target within the specified time frame. The selection of investment schemes based on your objectives is almost complete.
For long-term goals, equity mutual funds are suitable, while hybrid funds can be chosen for medium-term goals and debt funds for short-term goals. Select the best and most appropriate funds in these categories and start investing through SIPs (Systematic Investment Plans). Investors should remain unaffected by market fluctuations, remembering that investments made during market downturns tend to yield better returns in the future.
Once the target amount is reached, gradually shift from equity to debt investments with a clear plan. In addition to constructing a portfolio based on investment objectives, it is crucial to protect your life. Ensure that your family is secure in your absence by having a term plan.
If sufficient assets have not yet been accumulated, provide insurance coverage for future needs. A minimum of one to two crores of protection is necessary. Avoid plans that combine investment and insurance, such as endowment, moneyback, and ULIP.
A term plan offering higher coverage at a lower premium is preferable. Many do-it-yourself (DIY) investors mistakenly equate financial planning with investment planning. Understand that financial planning is only one part of the larger process.
If you find it challenging to set financial goals and proceed accordingly, consider seeking the services of an advisor. Overconfidence in self-investment, including in stocks and mutual funds, can be risky. A clear understanding of investment plans is essential.
Advisors should provide insights into the schemes offered, their functioning, and the associated costs of the investment schemes..
