Every Diwali, especially on Dhanteras, Indians do spend a lot on gold, either in the form of jewelry or in the form of gold coins. At best, they may venture to invest in debt funds but not much beyond that.
Considering that Muhurat trading
is a big event in India, we have our share of equity investors too. At the shorter end, there are those who bet on bullish sentiments on Muhurat trading day and take long positions. Then, at the longer end, there are the serious investors who prefer to invest in stocks from a long-term perspective. Finally, there are those who invest in property during Diwali. The belief is that any investment made during the Festival of Lights will multiply in value over time.
The bigger question is whether such a random approach is warranted or should there be a more systematic and deliberated approach. Actually, therein lies the answer. If you have not yet invested in anything yet, then this Diwali is the right occasion to embark upon that logical process.
Here is a four-step process you need to follow.
Step 1: Put down long-term goals to plan for
Set up the goals you plan to achieve in the next 20-25 years. You plan a house and a car in the short-term, that is obvious. How about planning for it with debt funds? You need to plan for your retirement, create a nest egg, as well as pay for your child’s education. In such cases, you need equity funds to work for you over the long-term.
Make your money work hard for you. Once you goals are set and your future value of goals is determined, you must go about tagging appropriate SIPs to your goal. That makes your task a lot clearer and purposeful.
Step 2: Ensure that liquidity and insurance are taken care of
Do I have six months of income as liquidity and am I adequately insured? This is the question you need to ask yourself. Take sufficient life cover to get some peace of mind and take adequate medical cover to take care of sudden hospitalization needs. Also, ensure that your assets and liabilities are ensured. These may not look like investments but these are building blocks that will enhance your risk appetite and enable you to invest in a more meaningful way.
Step 3: Do the debt products cover your short-term needs?
Your financial plan has two aspects viz. the debt component for stability & assured returns and the equity component for growth. Let us look at the debt component.
Be clear that debt will not create wealth for you. But if you have a goal in the next 3-4 years, you are better off with a higher proportion of debt. Don’t fall for the age-old bank FDs. The yields are too low and the tax treatment is not too efficient. Rather, prefer the security and tax efficiency of debt funds. The additional advantage of these debt mutual funds is the price appreciation that you can get if the interest rates go down. This can help you earn treasury gains which will enhance your returns. Again, don’t randomly invest in debt or debt funds but let it fit into your short- to medium-term goals.
Step 4: Make equities work for you and for your goals
Ideally, equity investments work most efficiently and give stellar returns only in the long run. When you have a time perspective of 15-20 years, then equities can generate higher returns with a relatively lower degree of risk.
Now, you would have a question; should you opt for direct equity or for equity funds? Here again, you must follow a two-step process. Use equity funds (ideally SIPs or STPs in case of lump sum receipts) to plan your long-term goals. Stick to diversified equity funds or multi-cap funds for this purpose. Based on your comfort zone, you can also look at direct equities but don’t tag them to goals. Use direct equities more to generate alpha on your overall portfolio. That is what equities can do best.
This Diwali, don’t go by your traditional approach to investing and be satisfied with just buying gold. Instead, start off with a reliable financial plan. In fact, gold is a must in your portfolio, but any gold investments must be in the form of gold bonds or gold ETFs or even e-gold. However, don’t let it go beyond 10-12% of your overall portfolio!