Pyramid of Personal Finance
August 2, 2022
Money Management
August 2, 2022
The next step
Investing has become a popular way to grow our finances over time. Knowing the purpose of our investments is key to making informed decisions when it comes to allocating our resources. In this blog post, we will discuss the importance of understanding the purpose to your investing and how it can help you make smart decisions.
Rohan is your typical millennial. Coming from a humble background, he has carved a space for himself in the urban world. After completing his post-graduation in business administration from a good college, he secured a decent job. His hard work and sincerity gave him a steady growth in his career in the initial years and he is now in a senior position in his company.
Now it is time for Rohan to think about his future goals. He wants to marry his girlfriend. Buying a house has been on his mind for quite some time. He also wants his parents to move in with him soon. With all these mighty personal goals on the list, it is not surprising that Rohan is a little anxious. He wants to be financially sound to take up all the responsibilities. Although he has saved enough and has multiple FDs, he is aware of the impact of inflation. He knows he needs to do something more.
Rohan regularly scans the leading newspapers and news channels to keep track of the best investment options. His close friend and colleague, Ajay had made sign up for a SIP when he had started his job. The investment had fetched him a good return in four years. As much as he is keen on mutual funds, he knows that he should explore more. Ajay keeps telling him about the new schemes quite often, but he is smart enough to not follow blindly.
Investments- chaos and curiosity
Rohan has grown up listening to stories about one of his father’s colleagues who made a fortune by investing in some random schemes. He also remembers how some of them lost everything due to one incorrect decision. In his office canteen, he sees how people panic when Sensex goes into the red. Rohan was also tempted to move the money from his FDs to equity when Ajay showed him how a particular stock had performed exceptionally well. The information overflow was overwhelming for Rohan and he wasn’t able to make the right decision.
Rohan is not alone. For most of us, the information around Sensex, share market, mutual funds, and bonds can be too much to handle. At the same time, the peer pressure to invest now or delay causes anxiety and fear. Sometimes, we tend to fall for the greed to benefit from the ongoing wave in the stock market and are disappointed. And sometimes, we regret not making the right move and lose the opportunity.
The chaos around a certain investment strategy makes us curious and we are tempted to try it. While it is natural to feel the curiosity, it is also important to gauge and see if the investment strategy or tool is favorable for us or not. What worked for your friend may not necessarily work in the same way for you. So, how do you ignore the chaos and stay focused on your financial goals? How do you align the lucrative investment strategies with your personal goals and benefit in the long run?
Think of it like this. You are driving your car back from the office. The weather is pleasant, you have your windows down and your favorite song starts playing on the radio. But there is way too much traffic and noise around you. What do you do? Simple. You pull up the windows to dim the external noise and focus on your song. Pulling up the windows will not stop the noise outside, but it will certainly stop distracting you. Similarly, you need to give purpose to your investing. The purpose will act as windows for you and will not let the external chaos distract you. It will make your investments work for you and help you rise above the chaotic market dynamics.
Give purpose to your investing
The objective of any investment is to fetch returns and help you achieve certain personal goals. Most of these personal goals will need some capital. Hence, before you start investing, the first step is to identify your personal goals and convert them into financial goals. For instance, a personal goal of giving your child the best education needs to be seen in terms of how much capital will be required and when. If you need, say Rs 20 lacs, in the next 10 years, your investment strategy should be planned for helping you achieve this goal. Similarly, buying a house or a fancy car, taking a foreign vacation, retirement, or pursuing a hobby can be your personal goals. Convert them into financial milestones.
The next step is to prioritize these goals. As much as you want to save and invest, there will be recurring expenses that will limit the amount you can save at a time. Prioritizing your goals will help you stay on track and invest systematically. A child’s education takes priority over a foreign vacation. Start with one goal and gradually add another one to the list. No matter what your strategy is, your financial behavior will decide the outcome. Financial behavior is what affects your decision-making. It is often driven by your personal biases and psychological influences and is not always rational. Investors often struggle to commit to their investment planning due to their financial behavior.
Your goals - your strategy
Rohan was keen on planning for his future. Although he respected Ajay’s opinion as a friend and colleague, he knew that he needed to look for someone with expertise and experience to help him plan his finances and investment strategy. He was looking for a Registered Investment Advisor (RIA) / Mutual Fund Distributor (MFD).
An experienced RIA/MFD is your compass in the unknown waters of investment planning. He will help you convert your personal goals into financial goals and then plan out a strategy to help you achieve those goals. An experienced RIA/MFD will not give one solution to every investor. He will understand your financial behavior, and your personal goals and then chalk out a strategy that works best for you.
An ideal investment planning does not rely on one or two tools. It has different asset classes with varying degrees of risk and returns. Your personal finance professional will gauge your risk appetite and include the right set of tools in your plan. For example, for a retired professional, too much risk may not seem very appealing, and he would like to stick to low-risk investment tools such as fixed deposits, government bonds, and debt funds. These tools may fetch you relatively lower returns but are safe and assure guaranteed returns. Along with this he may have some portion of the portfolio in equity so that growth in his financial wealth can beat or at least match the inflation rate.
But someone like Rohan would be willing to take more risks if that increases the probability of higher returns. His MFD/RIA will introduce high risk – high return investment tools in his planning. A large chunk of his portfolio will be made up of equity mutual funds. A mix of high risk – high return and moderate risk -moderate return investment tools are usually advised to people with average risk appetite. They settle for slightly lower but steady returns.
The role of RIA/MFD is not limited to investment planning. He is with you every step of the way. A span of 10-15 years or more of your investing journey will certainly have ups and downs. An experienced RIA/MFD knows how to manage the uncertainties of the investment market and is not easily fazed by the challenges. As a seasoned captain, he will help you sail through the choppy waters of the market.
An investment strategy needs to be reviewed regularly to accommodate changing circumstances. Personal finance professional will do that and will ensure that your ultimate goals are not compromised. He may also help you build capital for emergencies. This strategy might prevent you from digging into your savings or taking high-interest loans in case of crisis. Rohan was lucky to find an experienced MFD to help him draw a strategy. Now, all he had to do was stick to the plan and not let the external chaos distract him. You too can look for an RIA/MFD who has the right expertise, proper credentials and experience to plan your investment strategy.
