Investing Choices for Management of Personal Finance

Covid 19 Pandemic has been a trailblazing event that has immortalized the concept of saving & investing in every human being’s life. The importance of emergency funds to be parked in different avenues to earn decent returns with secured redemption has reached its all-time high. When you think about investing, it often circles around planning your financials today, so that you have a better tomorrow. Eventually, the onus is on you to secure your family’s and your own financial wellbeing. Previously the subject was rarely discussed but now investing is a much- hyped topic with explosive information available on the internet. Firmly speaking, investing is not at all what decadent internet clicks baits show such as ‘double your income in 2 months’, ‘Earn 1000 Rs every day by doing this.’

Investing is like marriage, a lifelong process of partaking funds for emergency needs, future goals, and retirement. It is a consistent process and not a yearly compliance like return filings.

Investing has a simple formula attached to it: Income - Savings = Expense, which simply means first invest in your future and then spend the remaining. Often, we do the converse & suffer from the inadequacy of funds. The investing space in India has exploded over the last 12-18 months with several platforms and apps gaining traction to serve the mass and mass-affluent communities. Not only the earning members of the family but also the students, home makers & even retired community have become aware of investing. People have been introduced to various jargons like all-weather investing, branded stocks, wealth creation investing, funds management etc. There is no rocket science to investing. The base of investing lies in understanding the golden concepts of Inflation, Present & Future Value. Let us understand these concepts in brevity.

Investing has an unornamented objective of creation of wealth by earning returns more than the inflation rate. The concept of Inflation, Present & Future Value simply revolve around the principle that the value of money in hand today will decline in near future. If our saved money is not invested or invested at a lower rate than inflation of the economy, it will lead to deflation of our saved money. The minimum aim should be to beat inflation post tax at least marginally so that our future purchasing power at least stays intact. The amount of money in hand today is better than the same amount of money in the future only if today’s money is invested in a prudent manner.

Some other equally important concepts which can help build a definite process for the management of personal finance are time horizon of investment & asset allocation.

The most important factor for creation of wealth is the time horizon of investment. Time horizon is influenced by the objective of investment. Investing can be for the achievement of future goals such as buying an asset, future education etcetera whereas another objective can be creation of corpus for the future. Higher the time horizon, higher the scope for compounding to work on our investment. Longer the investor stays invested, more robust is the compounding process as the interest also compounds. The time horizon of investment also helps in earning a much better return as it leads to avoiding the short-term volatility of market and creation of wealth. 

Another important factor is Asset Allocation. One should diversify the investment options into different products according to their long term & short-term needs. This strategy literally helps investors in avoiding the mistake of ‘Putting all the eggs in one basket’.

There cannot be an axiom to time horizon & asset allocation. It will differ from person to person according to their age, income, place, standard of living & future goals.

Current bull market is a hot selling cake for products ranging from as basic as Fixed Deposits, PPF, shares, mutual funds, bonds, bullion. The newest entrant into the market being used for windfall gain is ‘crypto currency’. It is important to understand that the taxation on redemption of these products varies. With the expansive growth of internet & availability of data, any investment product details along with its analysis are available at the click of a button. Although the information is easily accessible, it sometimes leads to increasing complexities due to problem of plenty.

One needs to be completely aware of the investment products, their risks & returns, return generating process, expenses tied to these products. Also, it is important to be regularly updated with recent dynamics of the investment products & their peers.

Risk averse investors may be more inclined towards fixed income banking products like Fixed Deposits, but they hardly beat inflation. Corporate Deposits & Bonds have become a handy resource to earn a better return vis a vis fixed income banking product. Though it is critical to understand the credit risk aspect while investing in these fixed income products. However, historical data manifests Stock Market instruments beat the fixed income banking instruments, Corporate Deposits, Bonds & Inflation in long term with Full Monty. Even the straight forward option of Index Mutual Funds fairly beats bonds & Debt funds in the long run as per historical data. Mutual Funds, especially the Systematic Investment Route of regular investing has become a good option because of diversification of risk and averaging plus they are midway between a highly active and passive investing strategy.

Long Run is the key word. One must take time & do appropriate research in building the process of investing. Once a process of investing is developed, discipline is absolutely pertinent without being influenced by the short-term fluctuations i.e., upward & downward fluctuation both. The key is to stay invested in correct products & get through crests & troughs without exiting. As Warren Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.”

Diligence in investment is a key metric as it is not a fixed income lottery ticket. Investment into these products without prudence for a windfall gain may lead to a complete loss of value. The most prudent investor is one who uses all the investment products to the best of their advantage by staying abreast with current market trends.

Concluding, Long term prudent investing is like staple home food, healthy & monotonous but truth be told staple food is the only route to healthy body. Similarly, long term prudent investing is healthy & may become monotonous but it is the only route to creation of large corpus with minimal risk.

The link Below shows various Historical Trends Shown by Shares, Mutual Funds & Average Inflation Rates                                                                                                                                   
 
Historical % Return & Inflation Data

The Data below shows Some Investment Avenues & Their Returns