Ten steps to reach your dream goal :: Business Line

Everyone follows different paths to reach their financial goals. While some prefer to invest in ‘safe’ assets others prefer riskier alternatives, and many believe in putting off larger expenses till their goals are met. No matter which method is used, there are some basic areas that need to be addressed to meet one’s financial goals.

Define financial goals – Goals should not be vague such as retirement or a better home. It should be specific, say, “I need to save Rs 5 crore for my retirement” or “I want to buy an independent 3 bedroom house in XYZ area”. The clearer the goals, the easier it is to plan and achieve them.

Create a financial plan - Review current investments, insurance, and other assets before making the plan. Decide on the investment avenues that will be used to achieve the goal. This will be based on your risk profile, age, earning capacity, tax bracket.

Risk tolerance - Do an assessment of the level of risk you are willing to take. Typically, higher risk assets yield higher returns and vice versa. If you are able to get a good night’s sleep while investing in riskier assets, then equity-based products are a good option, else it is better to invest in safer debt-based investment products.

Make a budget - This is one of the most important steps towards achieving one’s financial goals. A proper budget will help in ensuring that savings and investments are done regularly as well as keep unnecessary expenses and debt at bay. It is important to check the budget on a weekly and monthly basis to see if your expenses are within the budget or if they have gone over your income.

If you are in the green (income is greater than expenses) then your budget is working for you, but if you are in the red (with expenses more than income), then it is time to rationalise spending.

Automate Investments - It is advisable to invest on a monthly basis (through a systematic investment plan), as this will give one the double benefit of regular investment, or discipline in investments, and compounding. It will also negate the need to time the markets. Ideally, you should automate this process by a direct ECS transfer to avoid any last minute delays in investing.

Invest from an early age - Starting to invest early will give you the benefit of compounding. An additional few years will result in substantial difference in the value of the investment over a period of time. For example, if investor A starts investing Rs 50,000 per year at age 30 and investor B starts investing the same amount at age 35, when they both reach the age of 55, investor A has a corpus of Rs 61 lakh while investor B has only Rs 40 lakh (assuming both earned 8 per cent interest per annum). This shows that even a few years can make a substantial impact in the long run.

Diversify - Always seek to diversify portfolio, since one asset class could perform well, while others are posting low returns. Diversifying can help in reducing the risk in the portfolio, and give better returns over the long run. Ideally, your portfolio should be a mix of debt, equity, real estate, and commodities.

Time horizons - When making investments, time horizons need to be kept in mind. It is advisable not to invest money that is required for short term needs such as purchasing a car or digital camera, spending on a vacation, and such in equities as these are riskier in the short run.

Long term investment goals can be met with riskier assets, as over the long run equities are likely to give better returns.

Emergency fund - This is an important aspect of financial planning. You should always keep aside some money for emergencies in a liquid form (ideally in cash in a separate savings account). Ideally you should save four to six months’ of living expenses in this account.

Review - It is crucial to regularly review the portfolio, as what is a good investment today might not be the best investment a year or two hence. You can either monitor and rebalance the portfolio on a yearly basis, or based on the values of various asset classes in the portfolio.

(The author is CEO and Founder, Right Horizons)

Account for inflation when saving for retirement ::Business Line

Streamline the number of funds in your portfolio to make monitoring easier. Besides equity, you need to own assets that will provide risk cover and safety. So invest in insurance and debt options.

I am 43 and work with the Government. Apart from saving regularly through debt options such as bank recurring deposits and provident fund, I invest Rs 20,000 each month in equity funds to accumulate Rs 75 lakh towards my retirement corpus and daughter’s marriage. I require this sum by 2028. The following is my mutual fund portfolio. Suggest any changes if required.

Rs 4,000 per month in HDFC Equity; Rs 2,000 per month in Franklin India Bluechip, Birla Frontline Equity, UTI Opportunities, Quantum Long Term Equity, Reliance Equity Opportunities, IDFC Premier Equity and ICICI Pru Discovery; Rs 1,000 per month in HDFC Balanced; Rs 1,000 per month in Quantum Gold Savings.

Venkatram

Khammam

Franklin India Prima Fund: Invest :: Business Line

Bagging a business loan ::Business Line

Public sector banks seem to offer the best deals, though they may not be quick to disburse the loan.

Did you let the entrepreneur in you die, after some unsuccessful attempts to raise money from your family? Go dust off that project report, as this week we give you tips on raising a loan.

Banks should be your first choice when you want to raise seed capital for the business. One, they don’t ask for a share of business profit or a share in ownership and two, they don’t charge usurious interest rates.

Public sector banks today have a number of schemes in their bouquet, specifically for women entrepreneurs. It isn’t essential that you use only these schemes owing to your gender.

Instead, you should evaluate them on the basis of the cost of borrowings (interest as well as charges such as processing fee) and convenience.

HDFC Index Fund - SENSEX Plus Plan ::Business Line

Why we prefer real estate to stocks ::Business Line

It is no secret that Indians have a special affinity for real estate. In fact, one of the first important decisions that a young professional takes is to save enough to make down payment for a dream home. We do not have the same urge to buy shares or bonds. What makes real estate different from stocks and bonds?

One of the most obvious reasons is that real estate is a physical asset. But why should a physical asset give us more satisfaction than a financial asset? You will agree that living in a house worth Rs 1 crore or possessing Rs 1 crore worth of diamonds gives you more happiness than having Rs 1 crore worth of shares in your demat account. Why?

For one, you can touch and feel your physical asset. Your brain is typically excited when you feel the objects you own. This is true with real estate because a house is a consumption asset while shares have to be sold and converted into cash before it can be consumed. For another, you can use your physical asset even as you own it. You live in your house or sometimes even wear your diamonds. But you cannot flaunt your investments in shares or bonds.

Then, there is the high comfort factor that can be associated with real estate purchases. For one, you believe real estate is ‘safe’ investment, as you have rarely seen prices decline. For another, you believe real estate does not require the same quality of analysis as do stocks. Both these false beliefs can be attributed to the fact that real estate is not traded actively. This means wrong choice of stocks is visible while wrong choice of real estate is not. And visible prices cause regret when choices are wrong. Besides, your parents and grandparents are more likely to have bought real estate than stocks. It, therefore, becomes easy for you to do the same.

Finally, you leverage real estate without guilt and fear because you have been told that it is good to borrow to buy a house. But are you comfortable borrowing to buy stocks? True, real estate is a durable asset that you can transfer to your children. But so are stocks, as they do not have a finite life. So, why are you comfortable borrowing to buy a house? The reason, perhaps, has to do with visible stock prices; that can cause even more distress when your investment on borrowed money declines. As for leveraged real estate, you can draw comfort from the fact that you can live in it or earn rentals even if its price declines.