As the new financial year starts, many investors shall be committing new funds to their investments for various purposes like tax savings, family goals, wealth creation, short term needs etc. As a general tendency, there shall be hectic search of best investment options across various sources of information like internet/newspapers/TV programs/suggestion from friends/relatives.

Some investments shall be chosen on the basis of emotional connect like insurance policies and fixed deposits and some shall be outcome of social pressure/status like real estate, PPF. Some choices like investing directly in shares shall grow purely out of excitement of the investors.

We believe there are some investors who will be more rational and their choice shall depend upon the investment goals and selection of suitable assets to meet those specific goals.

We share below 8 steps an investor should take in this financial year to give his investments solid foundation to meet his future financial goals with high effectiveness.

1. Create financial goals and invest accordingly

Finding the best investment option without identifying the financial goal is like searching the fastest train without knowing your destination. Just like the way we choose our train depending upon the station we need to reach, investments should also be chosen depending upon the goals that we wish to achieve. Therefore, first create financial goals and then search investment options that shall suit and help you to fulfil those financial goals.

2. Re-allocate long term investments giving 6-8% returns to higher returns investments

Several investments/savings done over a period earn just 6-8% (post taxation) like fixed deposits, life insurance policies, recurring deposits etc. Investors start these savings keeping in mind their future financial requirements like child education and marriage and retirement. Investors shall understand that returns from these investments are not even sufficient to cover inflation (which normally lies between 6-10%). Because of this, the real value of money keeps on decreasing with passage of time. Over long periods of 10-20 years, these investments lose significant value and therefore are insufficient to help in achieving any significant financial goal.

Investors should review these investments and invest their money in options like equity/balanced funds or real estate which can deliver inflation beating, positive real returns. Positive real returns shall help the investors to grow the purchasing power of their money, which in turn will help them to fulfil their future financial goals with comparative ease.

3. Re-allocate investments generating taxable income to investments with tax free or tax efficient returns

Significant money/returns are lost in taxes that an investor may incur on his investments like FDs, recurring deposits, NCDs etc. There are several tax free/tax efficient investments like debt and equity funds that an investor should consider to save on taxes and to increase overall return on his investments.

4. Buy personal term insurance and health insurance

Loss of life and unforeseen medical expenses are the two biggest risks that may leave any family in financial distress. Even the best of the investments may need liquidation if such a need arises. To safeguard the investments and to provide financial security to family, investor should consider taking a term plan and personal health insurance. Nowadays, these plans are available at very low costs and should form part of your overall investment portfolio.

5. Buy health insurance for parents

Many investors take health insurance for their family to meet hospitalisation expenses but ignore health insurance for parents. Health complications in senior citizens is a common phenomenon. Lots of senior citizens lose vital savings due to unforeseen medical expenses, as they do not take financial support from their children. It is therefore responsibility of individual to take health insurance for their parents too, to make sure that neither his parents, nor he are bearing the burden of such medical expenses.

6. Create an emergency fund

How much a person may plan, some kind of emergency need may always come up in an individual’s life. In such a situation, it is commonly observed that investors break their long term, growth investments to meet their emergency cash requirements. In the process, they not only incur tax and exit load on redemptions, but also disturb their overall financial plan. Sometimes, these redemptions are done in down markets, which may mean further loss of capital.

We, therefore, suggest every investor to create an emergency fund, preferably in liquid/ultra short term funds, to meet these unforeseen expenses. The focus of the investor should not be to earn maximum return on this fund, but to ensure that in case of need, this fund is readily available to him and that his long-term investments don’t get disturbed.

7. Identify non productive investments and re-invest

Over the years, investors open multiple bank accounts due to various reasons and every account has some idle money laying in it. There are certain deposits/shares that also lay idle without any interest earnings or clear purpose. Investors should spend some time and identify and liquidate these scattered investments. The money realised can then be invested meaningfully to meet future goals.

8. Consolidate investments/insurance policies and create a file of each family member

As an individual passes from one life stage to another, the number of financial goals increase and so do investments. Over a period, several documents get generated like original policy bonds, fund statements, certificates etc. It is a good habit to keep a record of all these investments/documents in a file for each family member separately. This not only helps to locate your documents easily in time of need but also helps in regular reviewing of investments as every investment is at one place.

Conclusion

Every new financial year brings excitement and purpose among investors. It is a good time for investors to review their current financials and plan for future. Let’s grab this opportunity to create/revise our financial goals and plan our investments with a holistic view so that we achieve all our dreams and aspirations in a smooth and structured manner.

Happy Investing!

Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at pawan@investguru.in .