Ensconced in the numerals of the new year 2020 are two important financial planning dictates. First, you must invest more than 20 percent of your monthly income. Second, the repetitiveness of the numerals suggests that your investment too must be repetitive. A point to note here is that we have asked you to invest more than 20 percent and not save it because saving is a passive strategy whereas investment is an active strategy. Saving is the balance money left after deducting your monthly expenses from the monthly income. However, an investment is an asset or item acquired with the goal of generating income or appreciation. It orientates toward future returns, and thus entails some degree of risk. The question is how do accomplish this resolve. The answer is to invest before you spend and to invest repetitively.
The first Resolution is to invest more than 20 percent and let us deliberate on this. The obvious question that arises when we talk of investing more than 20 percent is what dictates the upper limit of this investment? The figure of 20 percent is a broad guideline for the sexagenarians. These people have retired from active work life and have fulfilled their domestic and family obligations, with little or no liabilities remaining. Therefore, for them to invest between 15 to 20 percent of their monthly income is a bonus that provides a cushion for their twilight years as septuagenarians and octogenarians. This cushion will help you to meet the rising medical and hospitalization expenses, which tend to surpass the average inflation index. Your pre-retirement investment planning must target meeting specific financial goals like catering for the higher education of the children, their marriage, purchasing a house, and building a retirement corpus that will cater for your monthly post-retirement expenses. This is tall order if you fail to understand that money grows only when you stay invested and the relationship between investment risk and its returns is directly proportional. To put it simply, it implies that you must start investing early in your career to stay invested for a longer time and invest in financial instruments as per your risk profile. Risk profiling is an evaluation of an individual’s willingness and ability to take risks for determining a proper investment asset allocation for a portfolio. One important variable that determines your risk profile is age. Ipso facto, you must invest more percentage of your monthly income when you are young and reduce it with advancing age. This is financially prudent since your family responsibilities and social obligations are much lesser in your young age. As a yardstick, you must invest up to 50 percent between 25 to 30 years of age and reduce it by about 5 percent every 5 years (see table alongside for details). The investor will want to know the suitability of the financial instruments to invest? If you are not financially knowledgeable and prudent, then it is worthwhile for you to consult a reliable financial advisor in Jaipur. Then, first, try and find out the spectrum of financial instruments available in the market. Thereafter, shortlist the financial instruments, based on your risk profile and investment horizon. Next, you assess their suitability in terms of returns offered along with its taxability as per your existing income tax bracket. Finally, work out the methodology to invest, i.e. lump sum or systematic.
The second resolution is to invest repetitively, which means regularly and systematically through an investment or transfer plan (SIP/STP). This imposes financial discipline and avoids emotions. A systematic investment involves investing a consistent sum of money regularly, and usually into the same asset class or financial instrument. Generally, it automatically withdraws from the funding bank account or transfers from one fund to another. It operates on the principle of rupee-cost averaging thereby reducing the overall cost of investment. It requires a long-term commitment from the investor. The investor has the option to invest through various types of SIP. He can invest through a traditional SIP that invests a fixed amount periodically in mutual funds. In between, he can increase the investment amount at a pre-defined rate and period through a step-up SIP. The investor also has an option to either lay down the end date for termination of the SIP or continue it till perpetuity, called perpetual SIP. If an investor foresees or undergoes financial hardship, then he can choose a pause SIP that will put his SIP payment on temporary hold for a period, without cancellation of SIP, ranging from one to three months. After completion of the pause period, the SIP restarts automatically. While SIP is purely a one-way process where the investor can only invest in the financial instrument from his funding bank account, STP is a two-way process, which in addition to investment also facilitates the investor in rebalancing his portfolio by transferring/switching investments from debt to equity or vice versa. In this case, the investor has the option to choose capital appreciation STP where he takes the profit part out of one investment and invests in the other. In case he chooses a fixed STP, then he will transfer a fixed sum of money from one investment to another. Alternatively, if he chooses the Flexi STP then he will transfer a variable amount, wherein the fixed component will be the minimum amount laid down by him and the variable component will depend upon the volatility in the market. An investor with a high-risk appetite and thorough market knowledge may choose a trigger STP by setting a target NAV, market index level, any specific event, date, or other information.