Ten commandments of financial planning

Mutual Fund Sahi Hai is a campaign we often come across in various media channels. While it is true that mutual funds are one of the best investment options available to meet short-term and long-term financial goals, it is essential for both new and experienced investors to understand and follow the ten Commandments of financial planning to help one make informed decisions to achieve their financial goals..

1. Define your investment goals

Start by drawing a personal finance roadmap. Clearly state the purpose or goal of each investment – whether it is for a second home or retirement or child’s marriage fund or education. Defining your investment objective will help you determine the investment tenure and the associated risks.

2. Evaluate your risk appetite

Understanding your individual risk appetite is crucial to planning your investments. All investments involve some level of risk, and knowing your tolerance for risk will enable you to make appropriate investment choices. For long-term financial goals, consider investing in asset categories with higher risk, such as equity mutual funds.

3. Practice proper asset allocation

Once you have defined your goal and risk appetite, it is important to allocate your assets wisely among different classes like equities, debt, commodities, real estate, etc. Diversifying your investments reduces the risk of losses and provides a smoother ride for your portfolio's overall returns.

Asset allocation is important because it has a major impact on whether you will meet your financial goals. If you don't include enough risk in your portfolio, your investments may not earn enough return to meet your goals. For example, if you are saving for a long-term goal, like retirement, it is imperative to include equities as it brings inflation adjusted growth elements.

4. Conduct due diligence when choosing funds:

Before investing in mutual funds, conduct a thorough research on parameters such as size of the fund house, the promoter/trustee of the fund house, fund manager's track record, consistency of fund performance, processes adopted in various market conditions etc. This due diligence will help you make well informed investment decisions.

5. Do not procrastinate – Time to invest is now

One of the common challenges investors face is to get started with their investing journey. Trying to time the market or waiting for the right moment to invest often leads to delays and missed opportunities. Remember, the power of compounding works best when you start investing as early as possible.

6. Stay invested during market downturns – Do not panic

During market downturns, it is common for investors to panic and make impulsive decisions, such as stopping/redeeming their investments. Avoid making such hasty decisions based on short-term market movements. Stick to your investment plan unless you have well-founded concerns about economic/macroeconomic conditions.

7. Regularly evaluate your investments

Active investors should review their portfolios at least once a year. This evaluation is necessary to reassess fund performance, rebalance asset allocation and to restructure the plans in the backdrop of:

• Assess whether the funds selected are performing as per expectations
• Determine whether the asset allocation is correct or needs rebalancing
• Investigate the reasons if the fund has not beaten its benchmark, before making any change
• If goal target is nearby or has been met, consider switching to safer options to protect the corpus created

8. Avoid overdiversification

While diversification is important, investing in too many mutual funds defeats the purpose and leads to suboptimal investment experience. Instead, focus on appropriate asset allocation and basis that invest in a few schemes, each tagged to a particular goal.

9. Understand tax implications and other charges

Beware of hidden charges and fees associated with your investments, such as transaction costs, advisory fees, and fund manager expenses. Choose a fund house that is transparent, efficient and does not impose unreasonable charges.

Tax applicability: Familiarise yourself with tax liabilities of mutual funds based on short-term and long-term capital gains. Always make it a point to consider the post-tax return of an investment when calculating the returns.

10. Think long-term

Investors often have a short-term view, even when investing in equity oriented mutual funds. It is essential to have a long-term vision, with time horizons spanning decades and more. By maintaining a long-term perspective, you can make better investment decisions aligned with your goals and remain focused and dedicated to achieving them.

These ten commandments of financial planning will help investors make sound decisions and stay on track to achieve their financial goals. Remember, financial planning is a journey, and by understanding and sticking to these principles, you can build a strong foundation for your future.

Disclaimer: The article is authored by Samrendra Tibarewalla,Proprietor,Riddhi Siddhi Financial Services. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.