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8 steps to build family wealth

11 Jul 2022 , 12:39 PM

Investing and saving are the conversations one should have at the dinner table in every house. Only when each member of the family contributes, financial stability can be achieved. This includes the youngest as well as the oldest members of the family. Gone are the days when children were not a part of family finances. How families approach investments have a large influence on how a child’s financial behaviour shapes when he/she grows up. Above all, the family benefits as a whole by staying focused on achieving a common goal.

These are some of the investment steps a family should take for their financial stability.

  1. Family goal setting and goal-based investing — Goal setting is a significant step before starting to save or invest money. Set your priorities and decide on the period of the goal. List down the goals — short-term, mid-term and long-term goals. Setting a goal is easier, however, working toward a goal requires self-discipline. For short term goals where investors require immediate liquidity, they can opt for debt funds. Those investors who wish to leverage the market opportunities but are wary of the constant volatility can either invest with hybrid funds (so that the portfolio is diversified into lower co-related assets) or passive funds (that aim for market-linked returns). Investors who are willing to invest for the long term and have a relatively higher risk appetite can choose equity funds. Goal based investing enhances the investment decisions and the portfolio also gets well allocated to different asset classes to meet the different types of goals.  

·         Save for the rainy day — Creating an appropriate emergency fund for unforeseen contingencies is a very important part -of managing finances for the family. Depending on the monthly expenses and commitments, a family can arrive at the amount they need to hold in the emergency fund. It helps navigate financial difficulties with relative ease and prevents from digging into other savings. To park your emergency money, you can choose to invest in liquid mutual funds that carry lower risks which and can be redeemed at any point as per investor needs.
·         Diversify family portfolio — Diversification of a portfolio happens when an investor invests money in different assets which perform differently in a particular market environment. Having investments spread across assets, helps minimise the risk of the portfolio. Ideally, investors must choose asset classes that have a low correlation so that if one asset class moves down, the other has the potential to offset it.  When a portfolio is well diversified, it tends to lower the impact of volatility. Investors have the option to either individually invest in asset classes like Equity, Debt, Gold etc. or they can simply invest via Hybrid funds and select the asset mix that best suits their needs.
·         Ensure downside risk protection — Before selecting your investments, understand the risk tolerance of the family. The risk profile of the prime bread earner is to be considered to define the same. A family with younger earning members can be relatively high risk takers. As the investor approaches retirement, the investment avenues have to become more safe so that can provide capital protection or income, depending on the individual need. Investing in Equity assets   may help in capital appreciation and debt investments may safeguard  the portfolio from downside risk.  Therefore, having a good mix of different assets in a portfolio is very critical to safeguard the investments the market risks.
Rebalance your portfolio from time to time - Rebalancing the portfolio is an important part of managing money.  Often rebalancing the portfolio keeps the risk in check with investor’s tolerance levels. To meet the changing financial needs, an investor can change the asset allocation and to meet the new requirements. Also, whenever the markets are changing, you can rebalance the portfolio to keep the asset allocation intact. it is ideal to monitor the portfolio annually or semi-annually and rebalance if necessary.

·         Focus on quality and growth - Consistency is one of the key attributes of a fund performance. Many mutual fund schemes may deliver good performance in certain market conditions but they may not be able to perform in others. Aiming to have schemes that can deliver quality and growth over a long period of time is crucial for a portfolio to perform in all market conditions. Investments that focus on quality and growth are less affected by the volatility in the market and can also help beat inflation.
·         Expand your investment basket — While having traditional investments in the portfolio is good, allocating some of the funds to newer avenues of investments may aid investors leverage key market opportunities. With increasing volatility, investors can invest in options which provide a significant buffer to their portfolio. For example, investors can consider allocating some portion to Gold ETF, Silver ETF, index funds, debt funds, liquid funds, equity funds etc. depending on the risk appetite and time horizon of the family. Having exposure to various kinds of investments gives the diversified benefits to the portfolio
·         Consult your Financial Partner Investors usually seek financial advice from friends, relatives, colleagues or someone whom they believe have investment knowledge. However, it is always better to take advice from experts who have been in the play for a long time and understand the dynamics of investments. This will minimise the chance of choosing risky investments in the portfolio. Managing finances requires a lot of attention, tracking, analysing and taking the right decision.
Finally, achieving financial goals of the family is all about team work and a family that is aligned to one central goal can achieve it better. Families must stay determined in the financial journey that they have created and plan to achieve small milestones on the way. After all, it is not only about money but also about the goals that the family is emotionally attached and hence it is very important part of reaching the goal. It not only helps build the family wealth but also helps in building a stronger bond in the process. The younger members of the family also learn from this cumulative effort and will become more proficient in handling their money when they grow up. 

Above article is written by Raghav Iyengar, Chief Business Officer, Axis AMC

Related Tags

  • Axis AMC
  • family investments
  • family wealth
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