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 !
What happens if you put all your eggs in one basket
“Don’t put all your eggs in one basket”
This is an old proverb which has been used over the years in all contexts including investments. Its applicability to your investments is not just about diversifying your portfolio by investing in various asset classes. What is more significant is the fact that these asset classes are not perfectly positively co-related to each other and their volatility and returns are driven by different market factors.
To understand this better let us consider the four main asset classes an investor usually invests in-
Equity, Debt, Gold and Real Estate
Equity and Gold – They are known to be negatively co-related to each other. During the secular downtrend in equity markets during the period 2007 – 2009, most equity investors lost money on their equity investments but gold prices went up significantly. Hence an investor with an exposure to both equity and gold in this period would have fared much better than someone who invested only in equity.
Equity and Debt – Though in the long run an equity market’s growth represents the country’s economic growth, they tend to be volatile in the short term, while debt markets even out this risk with their steady and consistent returns. Historically there have been periods where equity and debt have had an inverse relationship. When the dotcom bubble burst and the stock markets hit an all time low in 2000-2001,interest rates in India were on the higher side – in the range of 11%-13 % p.a.
Real Estate – Real estate has a very low co-relation with stocks and hence is an important avenue for diversification after the required exposure to stocks. Real estate has an inverse relationship with interest rates. Low interest rates in the economy boosts real estate investments. Hence during such periods, an investor who is mainly exposed to debt may not be able to beat inflation, but an investor who has invested in both will witness a rise in the value of his real estate investments which will compensate for his low yielding debt portfolio.
Hence not putting all your eggs in one basket and prudently distributing your investments among these asset classes ensures that whatever be the economic scenario, you will never end up with a situation of all your investments performing poorly.