Personal finance resolutions for FY 2022-2023
The last two years saw a lot of turbulence in the personal finance and investment space. Covid triggered stock market crash followed by a quick recovery and again followed by a small correction, high inflation, low interest rates, and the ongoing Geo -political crisis due to the Russia-Ukraine war.
Today as we step into the new financial year 2022-2023, some of these issues like the pandemic are hopefully done with, while the others and the associated uncertainty gets carried over .
So here is a quick checklist of how to protect your portfolio from a sharp downside in the event of such a crisis and some resolutions one can make for the financial year ahead .
- The key to protect your portfolio from too much downside risk is efficient diversification. Not all asset classes move in tandem.Equity and debt are not co-related, while gold has a negative co-relation to equity. Among all these, equity is the most volatile. And if one invests in equity with a long term perspective and adopts the monthly SIP route, such interim volatility will not affect you much as your investments will benefit from the cost averaging even when the markets are in a down run. To give you an example of my own personal portfolio – which is broadly something like 50 % debt ( Fixed Income and debt funds), 40 % equity and 10 % gold) , during the sharp stock market fall during March/April 2020, most equity funds/indices fell by close to 30 % , but since most of them were via the SIP route, the correction was less, and the subsequent installments over the next year reduced the avg purchase NAV , and the same funds which were in RED saw a huge profit when the markets recovered. The fixed income part did not get affected. The crisis saw 3-4 interest rate cuts which benefit the debt funds – most of the ones I had gave something like 9-10 % returns in that year.. And gold shone and reached an all time high. So, the net result was that my portfolio was hardly affected over the time frame of that one year. So, resolution 1 would be to optimally diversify your investment portfolio to maximize the risk adjusted returns.
- Tax optimization on your investments- One of the major objectives of the mass affluent salaried individual in India is to reduce taxes on the active income. Unfortunately you can do it only to a certain extent- we are a country with a progressive taxation policy. So the more you earn, the higher you pay in both absolute terms and percentage terms. But many of us remember to make these tax saving investments at the fag end of the year, when we are reminded by our employer to submit proof of investments for income tax rebate. And in a hurry to finish doing these investments we fall prey to the LIC /other Insurance agents trying to sell low yielding savings cum Insurance plans..and they are more than eager to get everything done for you at a short notice at your doorstep. So resolution 2 would be to plan ahead right at the start of the financial year – if you wish to invest in PPF for 80C rebate, try and do it in April , the first month of the financial year so that your money earns interest for the whole year.. If you follow this process for the entire PPF term, it will make a significant difference to your maturity corpus. In case of equity oriented /NAV based products like ELSS mutual funds and NPS, invest monthly instead of a lump sum so as to spread the risk. You can set up an auto debit for the required amount from your saving account. Apart from this, also look at minimizing the tax impact on your investment income- invest in high growth lower tax product like equity funds, and in lower risk debt funds to benefit from indexation.
- Always work with a plan in place. Have clear goals for all the financial milestones incl retirement , and make sure you align your investments to these goals. At the end of every year, see if you are on track as as far as reaching your goals are concerned. As your salary and income surplus grows, step up your investments every year. Do not keep idle cash at 2 % in your savings bank account. A penny saved is a penny earned.
Good luck for the year ahead !