Tag: Investor Behaviour

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.