On August 15, 2018, India will complete 71 years of being an independent nation and will celebrate its 72nd Independence Day. When we look back at the last seven decades, there have definitely been quantum leaps. Despite all the ground-level challenges, India has achieved real GDP of $2.6tn and is among the six largest economies in the world. One can argue about corruption, primary health, and primary education but India has also built a robust capital market that is vibrant and also a value creator. But above all and despite all the contradictions of caste, religion, creed, and color, India has survived as a vibrant democracy.
The GDP of $2.6tn, however, hides an important fact that the per capita GDP of India is just about $2,000, placing the nation below most of Eastern Europe, Latin America, and Central Asia. A logical outcome of this reality is that the concept of social security and future planning is simply absent, or one can say impractical with such low-income levels.
Regardless, the beauty of financial investing is that the power of compounding works in your favor irrespective of how much you allocate. The basic idea is that you need to save money and you need to invest this money in risk-bearing equities if you want to create wealth in the long run. That gives you financial freedom. After 71 years of being politically free, it is time for every Indian to experience economic freedom and economic empowerment. Here are five pledges to make towards economic freedom this Independence Day.
Pledge to squeeze the maximum savings out of your income
Let us not say that we will give up all the pleasures of a good life and just focus on saving. That is not the point. But let us pledge to extract value for money at each and every stage. For starters, cut down on unnecessary expenses. Review your budget thoroughly and do a zero-based budgeting if required. Every rupee spent should be followed by the question, “Does it add value”? See how much you can save by opting for online purchases, basement sales, bargain discounts, etc. You will be surprised when you realize how sub-optimally you were utilizing your money all these years. This is the starting point.
Pledge to invest in risk-bearing equities for the future
The biggest risk that we all take in our investments is not taking any risk. When you have 35 years of working life ahead of you and still if you put all your money in bonds, then it is a colossal waste of your risk-taking capacity. In the long run, only equities can generate wealth for you. You have surely heard of the story of how Rs10,000 invested in Wipro in 1980 is worth Rs550 crore today. You don’t need to worry about finding the next Wipro, but you can at least relax in the security of equity funds.
Pledge to set goals and move towards them
You have squeezed your savings out of income and you are sold on to equities as an asset class to create wealth. The question is, why are you taking all this effort? That is why you must have your goals clear in your mind. Unless you are clear about where you want to reach, it does not matter how fast you run. Set your goals first and then use the power of equities to move towards these goals. That is the right way to do it.
Pledge to constantly monitor and rejig your mutual fund portfolio
Investing has changed drastically in the last few years. It is not about buying physical share certificates and leaving it in your locker for your children to enjoy. Today, investing is a lot more about constant monitoring and rebalancing if necessary. You need to measure your investment performance against your goals and your intermediate goal posts. Only then will your investments really serve the purpose. Above all, what is the outcome of monitoring? It has to be actionable, which means you must look to tweak your portfolio based on the underperformance of the fund, outperformance of an asset class, your changing goals, etc. That is what is all about actionable.
Pledge to use the phased approach (SIP route) to investing
Make a pledge that you will start an equity mutual fund SIP on this Independence Day. A systematic investment plan (SIP) is a phased approach to investing in equity funds which gives you the added advantage of rupee cost averaging (RCA). That means when the market goes up you get more value and when the market goes down you get more units. It is a case of “Heads: I win; Tails: I don’t lose”. There is one more aspect about SIPs; they must be tagged to specific goals. Only then can these SIPs be monitored and only then will they be truly meaningful.
As you enjoy your holiday this Independence Day, just pick up your pen and starting planning for your financial freedom. Better still; you can also do it at the click of your mouse. The choice is yours! Happy Independence Day!