Financial Planning is a process which helps an individual to find out the shortest route between where you are and where you want to go financially. During this journey towards your financial destiny, there are some common mistakes which can off track you. Avoiding these mistakes will make the journey smoother and safer.
1. Financial Knowledge Vs Action
"Learn well what should be
Live your learning." (kural:391)learnt, and then
The much celebrated Tamil Poet Thiruvalluvar explains the importance of implementing whatever we have learnt in the above Thirukkural.
When applied this Kural to investment planning means that we need to educate and empower ourselves, apply the knowledge and act in consonance with our learning. Being aware is only of little help until you strategize and implement the awareness and knowledge into achievable financial goals. Strengthen and expand your action domain.
The action list needs to be drawn up based on individual goals and risk appetite. Ensure completion of the action items. Planning and enlisting is the first step and what follows is the effort towards completion of the tasks. Make a list every month and ensure adherence
Wealth comes only when you take massive action.
2. Don't let HR Dept /Tax consultant decide your financial destiny:
You are the best judge about your finances. Each person has different requirements and there is no one financial plan that suits all.
Invest regularly - Don't wait for the HR department or tax consultant to remind you of the tax season to start saving. As markets fluctuate, the best way to invest is through making regular instalments. This strategy of an astute investor helps in avoiding impulsive decisions that may later cause regret.
Do not restrict to tax savings only - The primary objective of investing is to make returns, and hence don't remain invested only to save tax.
3. Prepayment of home loan not priority if post tax interest rate is low:
Prepaying your home loans is a good idea. However, deciding when to prepay your home loan will help you save as well. Did you know you can also save consistently by deciding not to prepay your home loan? Read on.
- The interest paid on home loan qualifies for tax deduction of deduction of Rs. 150,000 from income tax. If you take a home loan at 10.5% interest, and pay tax at 30% bracket, your actual loan interest is only 7.35%.
- On prepayment, the tax benefit under section 80C of Income Tax Act, for principal amount of the housing loan cannot be utilized.
- Most of the interest is paid out in the early part of the loan tenure. If you have competed 75% of the loan term, then the interest component will be less and the principal component will be more. Since interest up to Rs.150000 is exempt, you don't benefit financially as the entire amount of the available exemption is not utilized.
4. Don't Diversify in one asset class only:
A right investment strategy is one which reduces financial risk. As goes the popular saying, "Don't put all eggs in one basket." Some of the popular asset classes are equities, debt, bonds, cash (money market) and property. As each asset class tends to behave differently during changes in the economy, a balanced portfolio which diversifies risks across categories is more desirable.
Do not overdo investments in direct equity - Equities carry high risk and promise high returns. Trading in equity requires knowledge about the market and the ability to take informed decisions on time, every time.
Invest in direct equity only after building a corpus- If you are highly tolerant to risk and prefer investing in equities directly, ensure that you have already invested in equities through the mutual fund route for a few years. This brings the basic understanding about the market and market cycles.
Allocate more resources towards liquid funds, ultra short term funds - Try and build a liquidity of 5 to 6 months' expenses in liquid funds. These funds come in handy during emergencies and unplanned cash outflows. Some of the liquid funds provide debit card facility.
Invest in debt - Debt investments provide to certain extent the safety of principal and are less risky than direct equity. To reap the benefits of both return and safety, diversify the portfolio and invest in gold SIP and debt SIP.
5. Be a committed investor, not just an interested investor:
More than merely showing interest in various investment modes, be committed to the strategies that you follow.
- The money chase isn't about just being interested in investments, it is about being committed to plan finances and strive towards them.
- Being committed helps to understand your position and also aids to target the goals and flex plans accordingly.
"Give me six hours to chop down a tree, and I will spend the first four sharpening the - Abraham Lincoln.axe."
Being a successful investor requires planning, prudence and patience. All these work concurrently, only if you have the money and confidence to make and stand by your financial decisions. Plan wisely - educate and empower yourself. With the right investment strategies and guidelines in place, you'd find the path to win the money race.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at firstname.lastname@example.org