X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
4 Things That Will Boost Your Financial Health - Outside View by PersonalFN
 
 
4 Things That Will Boost Your Financial Health

There are many investors that have very healthy portfolios. This means that not only have they invested in strong, long term, wealth building mutual funds and other personal finance instruments, but they have also invested keeping certain strong investment guidelines in place.

If you want to be one of these investors, all you need to do is follow these 4 simple guidelines.

  1. Know Your Asset Allocation

    Most individuals that come to us for Financial Planning aren't sure what their ideal asset allocation should be. People have heard the thumb rule that your equity exposure should be 100 minus your age, so they follow the thumb rule and put the remaining money into debt.

    This is not the right way of doing things.

    Your asset allocation should be across the 3 primary asset classes - equity, debt and gold.

    The amount that you need to have in equity doesn't depend on your age, but rather on your goal time horizon and your personal risk appetite and tolerance. If you have 10 years left till your financial goal comes around, you can go up to 75% into equity, with 10% and 15% in debt and gold respectively. If you have less than 3 years to go till your goal arrives, try and avoid exposure to equity altogether and go completely into fixed income products. Considering the current interest rate scenario, your debt portfolio could yield strong gains.

  2. Don't Underestimate the Inflation Effect

    Inflation is going to greatly increase your cost of living as the years pass. This is a fact. In order to maintain your current standard of living, you are going to spend more money. Everyone is going to experience the effect of inflation. Some people will need to reduce their standard of living. Others who have anticipated and planned their investments to offset inflation, can either maintain their standard of living, or if they have planned very well, can increase their standard of living.

    Know which group you would like to be a part of and take the proper financial planning steps immediately.

  3. Use the Power of Compounding to your Advantage

    If you take a look at the table below, you'll see very clearly what the power of compounding is.

    Consider a small sum of Rs. 100 invested for 5 years yielding 5% per annum. It grows to Rs. 128 at the end of 5 years, with annual compounding. Now consider that it is invested for 20 years, at 5%. It grows to Rs. 265.

    Does the rate of interest matter? Certainly, even a small increase in your rate of return or interest will have a large impact on your maturity value. Consider the same Rs. 100 invested for 20 years at 20% per annum. It grows to become Rs. 3,834. That is, it grows more than 38 times, in 20 years, at 20% per annum, compounding annually.

    At the End of Year /
    Rate of Interest p.a.
    5% 10% 15% 20%
    5 years 128 161 201 249
    10 years 163 259 405 619
    15 years 208 418 814 1,541
    20 years 265 673 1,637 3,834

    So when you invest, remember that time in the market is better than timing the market.

  4. Know Your Goal Amounts

    A large part of the data gathering process when building a financial plan comprises quantifying our clients' goals such as retirement, child's education, house purchase, car purchases, child's marriage, family vacations and so on.

    Let's take retirement as an example:

    What does a peaceful retirement mean for you? Does it means monthly household expenses of Rs. 50,000 and annual medical and travel expenses of Rs. 4 lakhs, all being met by your investments? At what age do you want to retire? Is your spouse currently working? Would your spouse and you like to retire at the same time? Would you like to take regular holidays in your golden years? Would you like to take up a hobby, or spend time doing social work? Is it likely that your expenses will go down during your retirement years, or likely that they will go up? Once your planner and you together quantify your goal, by answering the relevant questions, you will know how much money you need to build to achieve each goal, and can start working towards building the corpus for each goal.

    The 4 guidelines given above are easy to remember and equally easy to implement. Once you implement them, you will find that you are automatically less swayed by market movements and can invest with a defined purpose i.e. to achieve your financial goals.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "4 Things That Will Boost Your Financial Health". Click here!

  
 

More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

What Are E-Wallets And How To Use Them (Mutual Fund Corner)

Feb 12, 2016

PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

Is Consumption Boom Over In India? (Mutual Fund Corner)

Feb 2, 2016

Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

Feb 1, 2016

Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

Aug 4, 2017

The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS