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All You Wanted To Know About Mutual Funds

A year back Mutual Funds only brought one thought to peoples’ minds ‘Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Over the past year, Mutual Funds hold much more meaning than the advertisements rattling off the statutory disclaimer. Mutual Funds Sahi Hai! With so much information and mis-selling around us, we need to filter out the noise and understand what Mutual Funds are and the basics of investing in Mutual Funds.

So here is a Beginner’s Guide To Mutual Funds –

At Happyness Factory we help you understand your goals, place them on a timeline and then create a plan to save and invest toward these goals. We also help you evaluate the various investment avenues you can invest your money in depending on your risk appetite and investment horizon.

What Is The Right Time To Exit Your Mutual Fund Investments?

Investors’ thought process and behaviour while choosing a Mutual Fund to invest in usually mirrors their behaviour while exiting the investment as well. If you have chosen a Mutual Fund because it was doing well in the past few months, then you’ll probably feel like selling it if it under-performs for few months. You will then move to another fund that is currently performing well and continue this vicious circle.

In reality, continuously worrying about market conditions and obsessively tracking your returns is futile. When the market is falling, most investors panic and want to exit their investments to ‘mitigate’ their losses. The trap of wanting to invest in a ‘better performing’ investment avenue is always very tempting but very harmful.

Before panicking in times when the markets aren’t doing well, you must realise that Mutual Funds are actually a portfolio of financial instruments like stocks and bonds. Thus, as they are diverse portfolios with instruments having varying risks and characteristics, a decline in one or a few of the stocks can be offset by other assets within the portfolio that are either steady or increasing in value.

So, while you may want to avoid worrying about market ups and downs, there are few circumstances when you may have to exit your investments due to some pressing needs. These are a few situations in which you should exit your Mutual Fund investment –

When you need the money for a goal: Most of us have tangible goals like buying a house, funding a dream vacation or providing for our child’s education, for which we save money. At least 6-12 months before you need money for a goal you should sell your equity investments and move the funds into a fixed deposit or floating rate fund. If the market is down at this point of time, see if you can utilize any other source of funds for your goal or check whether you can wait for an additional period of time. This decision on whether to ride the downturn a few months before you need money is completely based on your risk tolerance and varies from person to person.
When you need money for a personal emergency: There might be a time when a personal emergency warrants far more money than the money you have saved in your Contingency Fund. At such times when Bonds, PPF and Post Office instruments might have a lock-in, you can look at selling your Mutual Fund investment which is not performing.
When your investment has gone sour: There are periods where your investment will under-perform the broader market. Should you immediately sell at this point? We generally give any fund manager a couple of quarters of under-performance especially if he has a consistent track record of delivering risk-adjusted returns. Check out the reason for under-performance whether it’s due to high concentration to few sectors, or a fund manager change or bad market timing etc. Generally, when a fund does too well, there is a lot of money that flows into it and hence you might see some under-performance in the funds’ performance due to excess cash in its portfolio. However, if there is a change in the fundamental attribute of the scheme and it does not match the reason you invested in the fund, you could consider exiting it in consultation with your Financial Coach.
When you need to re-balance your portfolio: Asset Allocation is one of the key decisions that you must make when it comes to your money and studies have proved that Asset Allocation accounts for almost 91% of your investment performance. Suppose you decide on an exposure of 60% Equity and 40% Debt, but because of the bullish market conditions, your equity exposure has gone up to 80%, then to bring back the portfolio to its original allocation, you would need to sell Equity and buy Debt. In such cases you can shift from an Equity Mutual Fund to a Debt Mutual Fund also.

This is where consulting a good Financial Coach will help and they will not only help you with your ideal Asset Allocation but will also review your portfolio at least once a year, to ensure it is on track with your goals and matches your risk profile.

Thus, as you can see above there are situations where you must exit your investment irrespective of how the market is performing. However, continuously panicking when the markets go down and trying to continuously time the market is futile. At Happyness Factory, we believe “It’s not about timing the market, but about your time IN the market”. When you stay invested for a long period of time and focus on achieving your financial goals, these phases of bad performance will not matter.

5 Financial Goals to plan in your 40s

Mr. Joshi, a senior executive in his early 40s, lives in an upmarket apartment with his wife, a teacher, and their 12-year-old daughter Avani. His Facebook posts are a source of envy to his friends who see him taking exotic vacations and checking into new restaurants every weekend. Yet, he is vaguely stressed about maintaining his current lifestyle and planning for his major future financial goals. This is not Mr. Joshi’s story alone.

As a financial coach would say, Mr. Joshi is now in his peak earning years and it is in this phase that he has a great opportunity to create wealth for his future goals.

Mr. Joshi, like many others, has been making ad hoc investments to ensure he is saving. For him, investment is all about starting a SIP, asking his broker for the next big investment ‘tip’ – the upcoming IPO, that great stock tip or the ‘best’ insurance plan, or saving through PPF. As for his expenses, even though his earnings are high, his expenses (including EMIs, insurance premiums, and lifestyle and education expenses) are higher and there is practically nothing left every month. The question is – Is this approach going to help the Joshi family meet their future financial goals?

The truth is any decision you take about money impacts your overall finances. However, when we decide to invest in real estate or take a loan or buy stocks or mutual funds, we do it without considering the impact of one decision on the other and without considering how this impacts our future financial goals.

Like Mr. Joshi, most of us are unable to identify all our important financial goals and chart a simple, implementable plan to achieve these goals. However, if he were to begin the goal-based financial planning process now, let’s see what a few probable goals would look like –

Setting financial goals is the most important part of the financial planning process. Even if what you can actually invest might be lower than the required investment, it’s absolutely fine! Your earnings will increase every year and as long as you are disciplined with your investments and keep increasing your investments each year, your goals can be achieved.

Mr. Joshi’s story is often reflected by many people. The 40s are a great time to give serious thought to this planning process as a lot of your financial requirements can be met if a proper goal-based financial plan is made and implemented.

Investing the RIGHT WAY

Have you ever booked your flight tickets and packed your bags before deciding a destination for a vacation? Sounds ridiculous, right? Of course it is! But most of us follow this method when it comes to finances. We invest our money in various products before understanding our financial needs and goals. The ideal way to invest is to follow the 3 steps shown below –

Investing the RIGHT WAY involves following the 3 steps below-

PLAN – Start with ‘WHY’

Planning your investments begins with understanding WHY you want to invest your money. Focusing on goals like ensuring a peaceful retirement, paying for your child’s education or purchasing your dream home will help you focus on what is important to you.

Once you know your goals and how much money you need to achieve each goal, determine when you want to achieve these goals. Classifying goals as short, mid and long term, will make them more achievable.

PROCESS – Focus next on the ‘HOW’

Once you have defined your goals and timelines to achieve them, start planning on HOW to achieve these goals. Knowing how much money you will need to achieve your goals will help you determine how much you should save and invest to achieve these goals.

PRODUCT – Proceed with ‘WHAT’ to invest in

After defining your goals and saving for them, you should decide where to invest your hard-earned money so that it can grow and help you achieve your goals. With the vast range of investment avenues like Bank FDs, Insurance products, Real Estate, Equity, Mutual Funds, etc. it can get overwhelming to decide where to invest your money.

This is where a good Financial Coach can be very helpful. An expert It really helps to have an expert help you navigate the sea of investment avenues and avoid the mis-selling which is rampant in the finance industry.

At Happyness Factory, we guide you through all these 3 steps in a well-planned and systematic manner. We help you understand your goals, place them on a timeline, and then create a plan to save and invest toward these goals. We also help you evaluate the various investment avenues you can invest your money in depending on your risk appetite and investment horizon.

Why a Goal Based Investment approach is your Best Bet

Traditionally, Indians have always been considered to be ‘good savers’. And while creating a savings corpus is a good thing and quite necessary to secure one’s future, this exercise can become quite pointless if these savings aren’t channelized into the right investments.

Over the years, we’ve moved from a savings mindset to a consumption one. Today, people would rather channel all their money into the next End of Season’s Sale rather than save and invest for the future. Of those who do invest, a majority are only concerned with and driven by one factor: Returns. But this is rather a foolhardy approach which ends up having the opposite effect on your wealth than the one you intended. By approaching your investments in the right way, you could end up creating a larger corpus, making the most of what the market has to offer and best of all, meeting your goals.

A goal-based approach to investing is the best way to make the most of your investments. The reason it is so successful is primarily because of two reasons. Firstly, when you set a particular goal, it caters to your unique needs. Therefore, you are emotionally invested in the process and tend to save diligently to meet the goal. Secondly, because this process accounts for your risk appetite and time horizon, the investment recommendations you receive are best suited to help you meet your needs. Therefore, those who invest towards goals end up more successful in their investment endeavours.

To begin the process of goal-based investing, you first need to figure out what your financial goals are. The basic idea is that unless you have a goal to work towards, you’ll end up going around in circles, even though you might have a general idea about your goals such as retirement, a trip to your favourite destination, children’s education, etc. It is upon further probing that realize that you need more clarity.

Start by asking yourself, “What’s important to me about money?”. Then go one step further and list down your answers in order of importance to you. There might be several goals you wish to achieve. Prioritizing your goals is imperative as it will help you zero in on your most important goals and channel your savings effectively. Once you’ve clearly defined your goals, begin quantifying them based on time; short-term goals for a period of 0-2 years, mid-term goals for 2-5 years and long-term goals for a duration of 5-25+ years.

Once you have established what your goals are, all you need to do is make payments towards each goal. This can be done either in the form of Lumpsum payments or by opting for a Systematic Investment Plan. Whatever option is chosen, the key is to be consistent with adding money towards each goal for maximum success.

There are a few important things to remember when you decide to go the goal-based investing way.

1) First, understand that when you’re investing in goals, particularly of a long-term nature, don’t be hasty in making judgements about this approach not being profitable. This is because short-term performance isn’t the best indicator of your overall position and shouldn’t be used to gauge your success. If you stick to your goal-based investment plan diligently, you’ll find that you will be able to spend a lot more in the future than you think you are capable of.
2) Second, due to our lives undergoing constant change, our priorities and goals tend to keep changing. So, it is extremely important to review and re-plan any goals that might become void because of changing life situations and circumstances.
3) Third, money holds different meanings for different people. For some, it could mean a secure future or access to education, while for others, it could mean the ability to travel or buy whatever they wish to. No two people will ever have the same goals that make them happy and so trying to match your goals with someone else is a pointless exercise.
4) Fourth, when it comes to getting advice regarding money matters, there’s no shortage of sources; family, friends, colleagues, insurance agents, etc. Be smart in what advice you take on. If you end up taking on all the advice given to you, it would result in a combination of products that might not necessarily go together and could end up hurting you instead.

Making enough money to lead a secure, comfortable and happy life is very important. But, a lot of times, people go too far in this bid to make money. A far more effective option is investing the money you have, even if it might not be a large sum, to make the most of your savings. Ask yourself what’s important about money to you and your financial goals will appear, giving you a clearer picture of how to best use your money to achieve those goals. So, go ahead and start listing down your financial goals to create a blueprint for your vision for your future.

7 Common Money Mistakes People Make

Financial independence is something a lot of people strive to achieve. Despite the high percentage of people looking to achieve this status, very few actually manage to. However, it isn’t impossible. The best way to achieve it is to understand how to manage money efficiently and make it work in your favor.

Indians are among the best in the world in most professions and are held in high respect within the global community. When it comes to money management though, the same people are guilty of committing several mistakes.

Lack of goal-setting and planning

Nothing meaningful in life can be achieved without setting goals and planning. There might be instances when course corrections might be needed but there also exist certainties such as death, and retirement that will take place. The idea is to set goals and plan for all eventualities from the start to avoid any problems later.

No written financial plan

Due to a lack of formal financial education, most people do not understand the nuances of financial goal setting, cash flow, and debt management, insurance planning, and related activities. This limited knowledge leads to costly mistakes. Reactive responses to the lack of a plan can be avoided by adopting a holistic view of one’s financial situation.

Investments done in an ad-hoc manner, due to time constraints

Work constraints are increasingly forcing people to cut back on family time. Hence, financial wellness takes a back seat when it comes to using the little time that remains. As a result, people base their decisions on the advice of those around them; CA, colleagues, family, friends, banks, etc. Thus, the finances of most people are a hodge-podge of products accumulated over time.

Too many expenses and loans

Due to a mentality of borrowing money to achieve goals but also often defaulting on loans, banking and recovery agencies are booming businesses. Historically in India, the savings rate has been high but over time, has witnessed a considerable dip. Despite having a moderately high and stable income, people’s expenses and loans, nullify their earnings.

Inadequate insurance against risks of death, disability, professional liability and loss of income

To most, insurance is an investment tool or a tax-saving option. As most people do not look at tax saving prior to January, insurance becomes an easy option to latch on to. Ad-hoc advice from friends and family members is another reason why people end up with a plethora of irrelevant policies.

Often, despite paying high premiums, most people end up with inadequate insurance coverage. There is negligible assessment of the actual financial risk a family might face. Most liabilities, critical illness cover, disability cover, no income protection or social benefits are other parameters that go uncovered.

Over-concentration in real estate

As stereotypical as it sounds, people do tend to hoard real estate, believing it to be a great investment avenue. There’s also the belief that in addition to being insulated from market oddities, real estate also provides huge returns and tax benefits. So, many borrow to invest in real estate and end up leveraged. This is a highly dangerous strategy to adopt. Especially during real estate crashes, the illiquid nature of real estate makes it a lethal investment option.

Myopic view of tax planning

Most believe tax planning to be a tool for minimizing taxes. They indulge in tricks like showing a limited income or weak balance sheet to fool the tax man. This can be avoided by understanding that the right goal of tax planning is to maximize post-tax income.

A basic solution to avoid these mistakes is to create savings, rather than an expenditure budget. Initially, especially if you aren’t in the habit of doing so, you might find it very difficult to construct a budget that works for you. But persevering and creating a savings budget is imperative to one’s financial health.

5 Big Money Questions You Should be Asking Yourself

“The importance of money flows from it being a link between the present and the future.”- John Maynard Keynes

With the amount of time people spend thinking about making more money in the present, it is quite surprising that planning one’s finances and maximizing them the right way for the future falls low on the priority list. People would have a financial masterpiece on their hands if only they spent more time on planning and allocating available funds in a systematic way as opposed to spending time and effort on accumulating money in the first place.

People often procrastinate when it comes to planning their finances. ‘I’m still too young to do this’, “The time isn’t right”, and “The market isn’t in the best shape right now”; are very common laments by people who stall their financial coaching process. But while chasing perfection is good, wasting precious investment time while pursuing it is a foolhardy thing to do.

Like with any other venture, the beginning is the hardest part. The right time to start, the tools needed for success, and how to get ahead are only a FEW questions that arise in people’s minds. In this case, however, the questions answer themselves. Carl Richards in his book, ‘The Behaviour Gap’ has provided a framework of the ‘5 big money questions’ that simplifies the planning process till it’s just a matter of striking the right balance.

1. How much can you reasonably save?

Creating a savings corpus for the future doesn’t mean that present-day needs should be compromised upon. The ideal plan involves keeping a portion aside from one’s take-home salary after considering current lifestyle and spending habits. In this way, the future gets slowly secured while the present is lived to the fullest.

2. What is your rate of return?

Returns need to be looked at as something that will enable you to meet your financial goals. This along with the level of risk one is willing to take while investing is what dictates the rate of return one should chase. Having either an over or under-par risk profile can be detrimental to the final corpus created.

3. How much do you need?

Estimating the amount of money required in the future is very important. A thorough assessment of one’s current lifestyle and needs must be done, following which inflation must be considered. This ensures that one doesn’t fall short of money in the future or cramp up their lifestyle in the present.

4. When will you need the money?

Money can be needed at any time. As such, certain goals need to be set to make sure that you have enough funds to combat whatever need arises. This can be done by setting specific goals and a fixed end date. This way specific needs such as funds for education, home, and the car can be prepared for and emergencies too can be tackled with relative ease.

5. What do you want to leave?

For a lot of people, leaving behind a legacy that will be remembered fondly is very important. It’s like leaving one’s stamp on the future. And one of the best ways to do this is to ensure that your future generations are secure. By planning the right way, it is possible to lead a comfortable life in the present AND provide sufficient for future generations.

While only five questions might seem insufficient to build your entire financial future upon, they can be thought of as five separate choices that provide the necessary balance to your plan. There definitely are many more questions that can be asked but these basic questions are difficult enough to answer by themselves and they must be truthfully answered to get the best results.

The hallmark of planning this way is that the focus isn’t on investments and their rate of return. This works because the rate of return is only a small fraction of the investment equation. Several other factors like, “Can I make a trade-off if I don’t want to take the risk of investing in the stock market?” Or “Is it possible for me to save more or if not?”, “Can I retire a little later or think about pursuing a second career?” must be considered.

Building a financial portfolio cannot be the single-minded pursuit of the highest available returns. It requires forethought, frequent course corrections according to the demands of the situation, and more than anything else, an effort to maintain a healthy balance.