6 Financial Moves to Make In 2018

Written on Monday, January 1, 2018
By Sanjiv Puri

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With 2017 turning into a bonanza year as far as equity investor is concerned, the new year 2018 could be the time to consolidate the gains. It could be the time for proper asset allocation. However, with debt assets such as bank deposits looking to generate even lower return in the near future, staying put with equity backed products such as equity mutual funds should help. Anyhow, for a long-term investor in mutual funds, markets corrections should not deter to continue with investing.

 

Rather starting 2018, make a plan to bolster one’s financial position by managing money for day to expenses to managing one’s investment portfolio. But before we look at what needs to be done, let’s rewind to look back at the year gone by in terms of your investments.

 

1. Are your investments in line with your financial goals?
2. Is there any new financial goal in life for which you are yet not investing?
3. Has your equity portfolio generated  the expected returns?
4. Has your investing increased proportionally to your increased income?
5. Is there any increase or decrease in your loans, debts or dues?
6. Did you do proper tax saving?
 
Put in place a financial plan
 
No matter if you are young and recently started your career or you are in your middle age, if you don’t have a financial plan in place, give it a priority over all other financial and investment moves. Start the year 2018 with a proper financial plan in place without any delay. It gives you a better control on your finances.
 
There’s isn’t a readymade formula, or a one-size fits all kind of plan. They will vary for each individual as circumstances are different for all. Still, some of the basic steps can be common to all and can give a head start unless one wants to build a plan more professionally through a financial planner.
 
Begin by identifying your short-medium-long term goals. Once identified, give them a value and the number of years to achieve them. For example, sending your child to a good institution is not a goal unless one says, “a good institution or a course after 16 years would cost me Rs 18 lakh at today’s cost.” Similarly, write down each of your goal with figures to back them up. This brings in clarity to the goals that your wish to achieve.
 
The goal that you wish to achieve is tagged to today’s cost. Inflation will make it costlier. So, calculate the inflation-adjusted cost of the goal and prepare an investment plan to save towards it. Do not start saving unless you know the actual amount required to avoid under-investing.
 
Choice of asset-class will be important to achieve various goals based on their tenure. Choose equity-related products such as diversified large and mid-cap equity mutual funds towards goals which are at least 7 years away. For short term goals, income funds and balanced funds can be used.
 
Illustratively, let’s say Mr. and Mrs. Sharma has the goal of enrolling their son into a post graduation course that costs Rs. 18 lakh. Their son is currently 7-years old and he will be able to enrolled in the course on turning 22. So the couple has a tenure of 15 years to invest. 
 
In order to create a corpus of Rs. 18 lakh, they will need to save Rs 3,600 each month for 15 years, assuming they can generate a return of 12 percent per annum, 
 
However, the couple has not estimated their financial goal rightly as they has not taken inflation into consideration. Post-inflation, the cost of the course will almost become Rs 50 lakh, assuming an inflation of 7 percent per annum. There by, to achieve their goal, the couple should save Rs 10,000.
 
The approach of ‘income minus savings equals expense’ should help you in achieving it.
 
Start getting rid of debt
 
In case you are rolling over the credit card dues, plan to get rid of it early on in 2018. Not paying dues on unconstructive debt such as credit card on time not only amounts to high interest rate of about 36 percent per annum but you also lose out on the interest-free period of about 45-51 days on fresh purchases. Avoid schemes like balance transfer and converting to EMI’s as they all come at a cost. Use credit cards but ensure you pay-off on the due date.
 
Home loan, a constructive debt, also requires a plan to get rid of it as early as possible. A Rs 35 lakh home loan at 8.6 percent for 15 years will have a total interest outgo of about Rs 27 lakh. Therefore, in addition to regular EMI’s, make a plan to keep making partial repayments towards the home loan to save on interest costs. Such prepayment directly reduces the outstanding principal amount and the interest gets calculated on the reduced principal.
 
Review and diversify portfolio
 
What better time to review your investment portfolio, especially the mutual funds schemes, than the start of a new year 2018. Although equity-based investing is meant for long-term, intermittent reviewing of the fund’s performance could result in optimum portfolio-returns.
 
While looking at the fund performance, do not be led by the fund’s return in isolation. Compare the scheme’s return as against its benchmark return. A scheme not being able to beat its benchmark on consistent basis need not be in one’s portfolio. If there are consistent under-performers, replace them with front runners after carefully evaluating the new ones. Importantly, to identify under and over performers keep a longer time horizon and evaluate over 3-5-7-10 year’s basis.
 
In addition, one may also consider evaluating the ‘category average returns’. Even if the scheme has outperformed the benchmark by a decent margin, there could be better performers in the peer group. A look at the category average returns will tell you how good or bad is your MF scheme’s performance against its peers.
 
Initiate goal-based SIP
 
SIP’s has sort of become a generic word for investing. Do a goal-based investing and stick to 2-3 schemes by investing in them through SIP and importantly link it to a specific goal, say for child’s education. Importantly, make sure you have diversified across market-caps and sectors through SIP’s. And once you have initiated SIP’s, avoid the temptation to redeem them to meet short-term household needs or due to market volatility. With three years away from goal, start shifting funds from equity MF’s to less volatile debt funds to preserve the corpus.
 
Plan and start saving for retirement
 
Retirement, probably, would be the last thing in the mind of youngsters. But if you were to ask a middle-aged individual or one nearing retirement, he would probably tell you that an early retirement planning could have helped them tremendously. If you start saving early, the money required to save for retirement will be much less than the amount you will need to save if you start (saving) at a later age.
 
Many youngsters, even if they have started saving for the long-term, may not have estimated their inflation adjusted retirement corpus. Assuming a 5 per cent inflation rate, a Rs. 50,000 monthly household budget balloons to Rs 1.7 lakh a month, nearly 3.5 times! One, therefore, needs to save towards the latter and not look at current costs. Inflation brings down the purchasing power of currency. If one seems comfortable with a crore of corpus, let's look at its worth or the purchasing power after 15 years at 5 per cent inflation rate: Rs 1 crore will fetch you goods and services worth only about Rs 48 lakh!
 
If you haven’t started, create a retirement portfolio in 2018, after properly estimating your post retirement needs. The second innings of your life needs a support from your current earnings.

 

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