• Mutual Funds
  • Capital Markets Research
  • CRISIL Fund Insights
  • Mutual Fund Investment
  • India Research
  • Views and Commentaries
October 24, 2019

This Diwali, don’t just pray for financial prosperity, plan for it

Diwali is here. A time when most Indians pray for a secure financial future, while also indulging loved ones with gifts (customary sweets, savouries, household items, gadgets, gold, etc.). The rituals and festive spending aside, Diwali could also be a great time to put action to prayers of prosperity by investing wisely.

 

Here and now, amid the festivities, are a few important steps you could take as an investor to add sparkle to your financial future:

 

Plan your finances with a purpose

 

Most Indians put a lot of thought into their Diwali celebrations, including cleaning, renovating the house, buying gifts, etc., all with a sense of purpose. However such purposefulness is generally not demonstrated in financial planning; most of it being rudimentary, or based on the moment/situation. However, investors would certainly be better off by having a purpose to financial planning. This means investing based on “life goals”, or in financial parlance, “goal-based financial planning.”

 

In doing so, investors are able to club their goals into various buckets of priority and time horizons and map them to their risk-return profile. This allows a holistic plan to be crystallised, with investments across multiple options. Much like the myriad sweets conjured up during Diwali!

 

Diversify your portfolio like Diwali sweets

 

Households make a variety of sweets and snacks during Diwali - some spicy, some sweet, some tangy, some crunchy – all alluring to a diverse food palette. Similarly, it is important to have a diversified portfolio in your investments to reduce risks from market movement, while also optimising your overall returns. The diversification, however, shouldn’t be namesake or haphazard. It should be based on holistic asset allocation derived from your financial goals, and mapped to your risk return profile and investment horizon.

 

For instance, investments for long term goals can be “more spicy” (i.e., risky), such as in equity, as the long gestation period for the investment reduces the associated risk. “Sweeter” options (i.e., fixed income investments with lower risk) could be applied for short term goals.

 

Systematically build your “Ram Setu”

 

Mythology has it that the Ram Setu, or the Adam’s Bridge, that connected India to Sri Lanka, was built one stone at a time and helped Ram achieve his goal of crossing over to Lanka. Similar is the case with investments. Disciplined and systematic investments over the long term can help achieve the investor’s goals. Investing in systematic investments plans (SIP) in mutual funds is one such good option, to meet longer horizon goals. Investing regularly in SIPs helps investors reduce the risk of market timing, while investing over a long period allows the money to compound and accentuate wealth creation.

 

Investors who have larger residual amounts to invest (for e.g., Diwali bonus) could alternatively invest through systematic transfer plans (STPs). This mode of investment allows investors to systematically transfer an amount of money from one scheme (source fund) to another (target fund) within a fund house. Investors could park the bonus money in a debt fund, preferably a liquid fund, as it falls in the lowest risk bracket within the debt fund universe.