Heres How To Make Investments Effective

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

Investing money is a simple process, provided one has a plan in place as well as a strategy to implement it. However, the ever-changing financial landscape and investors' habit of allowing emotions to take over their investment decisions during uncertain times often derails their investment process. Tax efficiency of returns is another area that often gets ignored as investors keep their focus on products offering guaranteed returns and hence fail to earn positive real rate of returns, that is, returns minus inflation and taxes. Hence, it is crucial to follow a tax-aware investment strategy and stick to investment plan during the entire defined time horizon. 

Here’s what investors need to do to ensure that they as well as those who are financially dependent on them don’t get exposed to unwarranted risks and that they have enough financial resources at different stages of their lives.

Risk management should be top priority
Although insurance, both life and health, plays a crucial role in protecting oneself from the implications of setbacks due to sudden risk to life and health, many investors err by ignoring this aspect completely. Either they do not think it is necessary to have risk cover by way of a life or health insurance policy or they do not buy the right product. Ignoring this important aspect can expose the family members to the risk of facing uncertain financial future. Hence, risk management has to be given topmost priority. In fact, before starting investment process, one must ensure that risk cover in the form of health and life insurance is adequate. It is equally important to do so through the right product. Besides, one must create an emergency reserve equivalent to 3-6 months expenses to take care of any financial exigency.

Invest to beat inflation
Inflation is known as a silent killer as it erodes the value of money over time. Unfortunately, not many investors realize that inflation is the biggest risk to their investments, especially while investing for their long-term goals like children’s education and retirement planning. While a number of investors prefer traditional options like FDs and small savings schemes over market-linked products offered by mutual funds, there are those who invest in the right asset classes like equity but don’t consider impact of inflation on the corpus required for these important long-term goals. As a result, they often fail to accumulate the required corpus and end up compromising on some of their dreams for themselves and their loved ones.

Focus on post-tax returns
While it is important to follow an asset allocation model as it determines risk and returns, it is even more important to figure out how returns will be taxed. After all, what one gets to keep after paying taxes will matter the most in the long run. The issue with traditional options is that returns are low and, at the same time, for most of these instruments, the returns are taxed at one’s nominal rate. Investing in tax-efficient instruments like equity and equityoriented hybrid funds allow investors to improve their gross as well as post-tax returns, albeit with volatility in returns from time to time.

Don’t compromise quality for ease of investing
The advent of Robo advisors and digital platforms has made mutual fund investing simple at low/no cost. However, investing in mutual funds is a process that begins with making an investment and ends when the defined time horizon gets completed. Therefore, one must be quite sure about one’s ability to select suitable funds, monitor the portfolio and analyze the impact of national and international events on their portfolio from time to time. If one is not sure, it would be appropriate to take help of an advisor who will not only handhold during challenging times, but also ensure that investments remain on track. 

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