Dear investor... The early days of a new financial year grants as good an opportunity as any other to plan for the next twelve months. Conventional wisdom identifies this phase as the best time to start afresh, a belief that has resulted in this epistolary account on a balmy April morning. It is indeed the right season to work on a range of projects, especially the ones that did not take off last fiscal. A superior allocation strategy, a bit of re-balancing, some automation of systematic investment plans, a few loan repayments and so on — on the whole, these are some of the boxes for you to tick.
Let us, for the sake of convenience, divide this into two major parts: assets and liabilities. On the assets side, your task could not have been more pronounced. Begin by checking the status of your portfolio. Consider especially the performance of all its components irrespective of asset class. Each class of securities has its own benchmark based on which its achievement is normally judged. Consistent under-achievers must be held under a fine microscope, and corrective action must be taken too. An asset that cannot be straightened out has no place in an ideal portfolio.
On the liabilities side, you need to start by examining your loans. Some of the most common obligations in today’s world stem from home and automobile loans. Personal loans too abound. If you are a habitual loan taker, you need to do your homework well. Find out whether you are spending too much by way of interest payments. Together, the latter can harm your case beyond repair. Credit card loans are particularly debilitating because they usually charge steep rates of interest.
Assets, first
Having delivered my introductory lines, let me underscore a few details. Here are some points.
Automate your investments. If you have not done it already, this is time to initiate SIPs. Make it as system-driven and paperless as possible. Let it all match your time horizon. A younger investor, for instance, may feel the need to begin long-term programmes, perhaps for 10, 15, 20 years or even more. ‘Time’ is luxury that an older individual may not have; a retired investor can hardly be expected to conduct SIPs for decades.
Re-balance your portfolio in order to meet your unique requirements (read: specific financial goals). An asset allocation that has gone awry must be amended at the earliest. If you have not done such re-balancing consciously for a long stretch, this is probably the most appropriate moment to commence on the exercise.
All this has to be done with the sole purpose of finetuning your asset allocation and, as an extension of the logic, derive smarter returns (but not necessarily increase risk). As a unique individual, you have specific risk-return parameters to follow. Your present asset allocation must be viewed through the prism of these parameters. And if the result is unsatisfactory, changes are in order. Simple.
Liabilities, next
Well, as I have pointed out earlier, loans are probably the biggest drags for you. An investor who has little control on interest outgo will not really enjoy the fruits of his labour. A definite step or two towards rationalisation of your personal credit profile is, therefore, strongly recommended. The question that follows, however, is a tough one: how would one’s personal credit score be improved overnight?
I know this is nearly an impossible task in the short term. Loans cannot just be repaid so quickly. Yet repayments (timely servicing of interest as well) are actually necessary if your creditworthiness has to improve. An investor who has mismanaged his loans is not an esteemed customer for lenders. No banks will offer him cheap loans.
In this connection, please remember that taking fresh loans to repay old obligations (“retire” is the word you may be looking for!) is not the most ideal practice. Some sections, however, do indulge in it, a tendency that invites censure from financial planners. Such an indulgence often leads to greater expenses (on account of higher interest, fees, charges and so on) for the average loan-taker.
De-risking is the other vital consideration for the average investor. Now, this too cannot be done perfectly by most. But you can manage some of your exposure by acquiring the right insurance cover. To begin with, look at your health plan. Ask yourself the critical question — “Is my medical cover enough in today’s context?”. If the answer is no, you should augment your coverage. Scale up your plan because you will need to tackle the ever-rising costs of healthcare.
I will also take a moment to tell you about term insurance. This should be a lot more cost-effective than traditional policies, particularly the ones that are based on principles like endowment or money-back. A number of term plans are available these days, and a great deal of variety has been introduced by insurance companies on this front.
Speaking of costs, the next obvious reference is to inflation and its impact on your holdings. Remember, retail inflation is over the 6 per cent mark. Ergo, your returns must surpass this. Additionally, if you are taxed at a relatively higher rate, the burden on your shoulders will be heavier.
The last word
An epistle is not complete without a few homilies, and this one includes its fair share.
• Focus on a strong mix of assets. Keep it diversified.
• Aim at growth so as to comfortably beat inflation and taxes.
• Remember, health insurance is critical. Go for a higher cover if you can afford it.
• Systematic investments let you gain from rupee cost averaging. Practise it religiously.
• Reduce costs by paring your interest outgo. Keep an eye on charges.
• Derive regular income if you deem it necessary. Invest in fixed-return assets over and above market-determined performers. Allocate wisely.
• Book profits as and when you get the opportunity. Re-invest if you have to.
Remember the oft-quoted words spoken long ago by the redoubtable financier J.P. Morgan: “The first step towards getting somewhere is to decide that you are not going to stay where you are.”
The writer is director, Wishlist Capital Advisors
