Q1. I have never invested in mutual funds before. What should I know before I venture?
Keep in mind a few points to make investing in mutual funds (MF) a rewarding experience.
- Know that there is an element of risk attached to every MF and it differs from category to category. Before you invest, check the riskometer that will show the degree of risk (low, moderately low, moderate, moderately high, or high) of that fund. It is important that you know this beforehand.
- The same scheme may offer a direct plan or a regular plan. Direct plans do not involve an agent or a broker. Without a commission or brokerage adding to the expense, direct plans give better returns than regular plans.
- Prefer an MF that gives consistent returns. For example, a fund that gives a consistent 10% return is better than one that has given 17% returns in the first year and a negative 10% returns in the second year. A consistent fund will generate better annualized returns in the long term.
- Choose automated investing via a systematic investment plan (SIP), where a predetermined amount is transferred from your bank account or another fund to the MF. Not only is this a disciplined way to invest, but it also delivers the benefit of rupee cost averaging. When the market is down, you will get more units for the same price. This will bring down the overall cost of investing and generate good returns in the long run.
- Remember that the returns provided by a mutual fund can vary from year to year. You may expect a scheme to deliver 8% returns. However, the scheme may give you 10% in one year and plunge to minus 2% the very next year. There might be periods of no returns, too. What is important to consider is the long-term prospect, looking at the period you are willing to stay invested.
- While mutual funds are a good investment option, never keep all your eggs in one basket. You must allocate your money across different asset classes (like gold, debt, etc.) to balance your portfolio risk. Also, you must periodically rebalance your portfolio. Whenever the proportion of an asset class in your portfolio goes up, book profits and reinvest that money in other asset classes within your portfolio.
Q2. I am 35, with a young family. Do I really need term life insurance?
Insurance is all about providing for your loved ones should an unexpected event occur. The younger we are, the more difficult it is for us to think of our own death. At the same time, we want to ensure that our family gets financial support even when we are not around.
Under a term insurance policy, one pays a yearly premium for a certain period. After the death of the insured, the beneficiary gets the insured sum. The terms and conditions may differ from policy to policy.
Your financial planner will help to choose the policy that is the best fit for you from the many options available in the market.
Q3. What does financial literacy have to do with my health and my life?
Financial literacy is all about having a good working knowledge of how personal finance works. When you are financially literate, you gain in multiple ways.
- It develops good savings habits. Imagine your child has just picked up a job and, following your advice, starts saving and investing immediately. What your advice has done here ensure a worry-free retired life for your child, even if that eventuality is many years away.
- It helps you make wiser spending decisions. You will consciously keep a track of your budget (cash inflow and outflow). When the budget helps you consciously rein your spending, you can save regularly.
- You are more likely to make smart financial decisions when you are financially literate. These decisions can boost your credit score, which can have a positive impact on several facets of one’s life—getting a job, applying for a credit card, renting an apartment, buying a home or car, getting insurance, and so on.
Overall, when you are financially literate, you also become a better money manager. You enjoy better mental health and can spread a cheerful outlook about money.
Q4. What is goal-based investment? Why is it important?
Goal-based investment is a relatively new approach to wealth management that emphasizes investing with the objective of attaining a specific life goal or goals. Rather than focusing on generating the highest possible portfolio return, the goal could be saving for children’s education or building a retirement nest egg.
The traditional investment approach usually focuses on outperforming the market while staying within the investor’s threshold for risk. Goal-based investing uses the individual’s asset pools and applies an investment strategy tailored to the client’s specific goals.
If a client’s main goals are to save for imminent retirement and to fund the college education of their young grandchildren, the investment strategy would be more conservative for the former and aggressive for the latter. In this case, the asset allocation for the retirement assets might be 10% - 20% equities and 80% - 90% fixed-income, while the asset allocation for the education fund may be 50-60% equites and 40-50% fixed-income. Time horizon is another important factor. The farther away a goal, the higher can be the allocation to equity.
Goal-based investing increases one’s commitments to specific goals. The progress is tangible and can be easily gauged. The sharper focus on the goals reduces negative behavioural biases such as impulsive decision making and overreaction.
International Money Matters Pvt Ltd is a SEBI registered investment advisory firm. If you have any personal finance queries, click here to talk to advisors from IMMPL.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.