Hemant Rustagi
CEO, Wiseinvest Pvt. Ltd
Investing is a process that requires you to have a plan in place as well as a strategy to implement it. Unfortunately, the ever-changing financial landscape and the resultant uncertainties often bring emotions and biases of investors to the fore, compelling them to abandon their investment process. The tax efficiency of returns is also an area that often gets ignored as investors keep their focus on products offering guaranteed returns thereby missing an opportunity to earn a positive real rate of returns, that is, returns minus inflation and taxes. Hence, it is crucial to follow a tax-aware investment strategy and stick to an investment plan during the entire defined time horizon.
If you want to ensure that neither you nor those who are financially dependent on you get exposed to unwarranted risks and that there are enough financial resources at different stages of your life, here’s what you need to do.
1) Make risk management your top priority
Insurance plays a crucial role in protecting us from the implications of setbacks due to sudden risk to life and health. Many of us either don’t think it is necessary to have adequate insurance coverage or do not buy the right product. Ignoring this important aspect can expose your family members to the risk of facing an uncertain financial future. Hence, risk management must be your top-most priority and that too at the start of your investment process.
If for some reason you fail to do so, it is never too late to get started with this process. It is equally important to buy the right insurance product. For example, a term insurance plan is a much better option than buying an investment-cum-insurance product both in terms of costs as well as having an adequate risk cover.
Besides, don’t ignore the need to create an emergency reserve equivalent to at least six months expenses. This will allow your investment process to continue un-interruptedly even if you are faced any financial emergency.
2) Invest to earn a positive real rate of return
Inflation is known as a silent killer as it erodes the value of your money over time. Unfortunately, not many of us realize that inflation is the most significant risk to our investments, especially while investing for long-term goals like children’s education and retirement planning.
While a number of investors err by investing mainly in traditional options like FDs and small savings schemes for their long-term goals, some have the requisite exposure to potentially better market-linked products offered by mutual funds but still struggle as they fail to consider the impact of inflation on the corpus required for these critical long-term goals. No wonder, they often fail to accumulate the corpus needed and end up compromising on some of their dreams as well as of their loved ones.
3) Focus on post-tax returns
While asset allocation helps you choose the right asset classes in line with your time horizon and risk profile, tax-efficiency of returns must also be an integral part of your investment strategy. After all, what you get to keep after paying taxes will matter the most in the long run. The issue with traditional options is that returns are low and at the same time for most of these instruments, the returns are taxed at your nominal tax rate. Investing in tax-efficient options like mutual funds allow you to improve your gross as well as post-tax returns, albeit with volatility in returns from time to time.
4) Focus on quality rather than ease of investing
The advent of Robo advisors and digital platforms has made mutual fund investing simple at low/no cost. However, investing in mutual funds is a process that begins when you make an investment and ends when your defined time horizon gets completed. Therefore, you must be quite sure about your ability to select suitable funds, monitor their progress and analyze the impact of national and international events on your portfolio from time to time. If you are not sure, it would be appropriate to seek the help of an advisor who will not only handhold you during challenging times but also ensure that your investments remain on track.
