How to plan your finances better

What comes first to your mind when you talk to any financial advisor? Mostly it is a query about the expected returns on the suggested investment products.

Returns are indeed critical, but should they be the single most consideration? Ask any financial advisor, and he will tell you the return-chasing approach is a sure-shot recipe for a financial disaster.

Asking about the return should be the last question on the investor’s mind, as there are more important matters to be considered for safeguarding your financial future. Before investing, you should ask yourself some key questions. Your financial advisor can help you explore the answers.

1) Do I have enough insurance?

Insurance is the first step in planning for your finances. On a ladder of financial planning, it comes much before the actual investment. Sadly, most people ignore it. One needs to protect oneself from financial emergencies. What if a health emergency strikes today? All your savings may go for a toss if a family member gets hospitalised. A family floater policy covering all family members is crucial. If you are the sole breadwinner of your family, you need life insurance to protect your family. Know that insurance is not an investment. Avoid savings-linked life insurance plans that promise you money at maturity, and prefer term insurance.

2) What is my risk appetite?

You should know yourself well before you invest. Some are aggressive investors who can stomach volatility in their portfolios. Some, not so much! They cannot stand seeing their portfolio in red. Some are balanced. They may not take risks aggressively, but they are not too scared about mark-to-market losses either. Assessing your risk appetite helps you and your financial advisor choose products that align with your investment style and make you feel comfortable.

3) Why am I investing?

We invest to grow our money so that it beats inflation and, at the same time, generate more returns. But chasing the highest possible returns alone will not help you. You should know why exactly you are investing. Is it for your retirement planning, your child’s education, or probably for a vacation? You need to know your goal. Once you are clear on the why of investing, the where part becomes simpler.

4) Where should I invest?

You cannot put all your eggs in one basket. There cannot be one product to suit all your investment needs. Know the time horizon of your goals to figure out suitable investment products. For example, if your goal is a year away, you should prefer fixed deposits or debt mutual funds whose underlying portfolio has a maturity of about one year. Investing in stocks - through equity mutual funds or individual stocks - may not be ideal for your short-term goals. At best, you may consider hybrid funds if you can take some risk for this goal. However, for a long-term goal, such as retirement or higher education for your newborn child, you must get into equities.

5) How much should I invest?

Once you know your goals, you should be able to figure out exactly how much money you need to achieve those goals in the future. Now your financial advisor can help you calculate the present value of the same in terms of lumpsum or systemic investment plan (SIP). Such calculations take into account the inflation rate and assumed returns on your investment
product.

6) When should I sell?

Needless to say, you sell when you achieve your financial goals. But the challenge comes when you don’t see your portfolio performing well. For example, if you have invested in equities and a Covid-19-like black swan event triggers a sharp fall in the stock market, you may get jittery. Such events drive investors to sell it all in a moment. This reaction, however, is a cardinal mistake.

Before making a hasty decision, seek guidance from your financial advisor to ensure you stay on course.

Remember, asking the right questions makes you a wise investor and keeps uninformed expectations at bay. Finding answers to the six questions can make your financial planning impeccable and your investment journey disciplined.

(The author is managing director and chief executive officer of Axis Securities)