Disciplined approach to investing can make you wealthier

Juzer GabajiwalaVentura SecuritiesEveryone must have made a list of resolutions for 2015, like I will get up early, start going to the gym, go on a diet plan, avoid smoking, etc. We are sure that these resolutions must have been followed during the first week of 2015 and one would be back to square one from there on. Unfortunately, all resolutions are broken even before the first month of the new year has gone by. Thus, it makes sense to instead make resolutions such as I will not go to the gym; I will not get up early, I will eat junk food, etc. If one behaves in the same manner as in 2015, i.e. follow resolutions for only the 1st week, we would be in a better position to achieve the broken resolutions of 2015 in this new year. Well this cannot be done unfortunately, and we have to make positive resolutions and not negative ones. So, let us look at only a few simple resolutions which can lead to a better financial life. Don’t chase returns but try to earn an inflation+ return: One should have a plan for every investment that one holds or is planning to hold. However, people always chase returns by selling off poorly performing investments and buying into investment that have displayed abnormal recent returns. This is known as “buying into greed and selling on fear”. All investors want to double their money overnight. Alas! that is just not possible.However, one should always focus on ensuring that investments beat inflation, i.e. earn positive real returns on a post-tax basis. Once this focus is achieved, a lot of things will start falling in place. All you need to do is ensure a higher rate of returns than inflation.As seen from the data below, the Sensex, i.e. equity, has been able to generate the highest positive real returns of 5.66% whereas Bank FDs have the lowest returns of -1.78%, i.e. negative real returns.^Weighted average rate for last 25 years **Weighted average inflation for the past 25 years*Assuming the investor is in Rs.10 lacs and above tax slab who is taxed at 30.90%. Data as on Dec 28, 2015. Be adequately insured: Generally, people have inadequate or no insurance (Life and Medical) at all. One should have adequate life insurance in order to provide financial security to one’s family and dependents. The best way to have adequate life insurance is by buying term insurance cover as the costs are very low compared to other traditional insurance plans. That is all that’s needed; there is no need for any other exotic plans.Moreover, one should also buy a medical insurance cover for oneself and one’s family, despite being covered by the group insurance of one’s employer. In fact, one should not even consider investing before first taking a medical cover. Medical insurance is needed by everyone from a child to a healthy individual. It is the cheapest when one is young and as one grows older, not only does it become more expensive, there is a chance that many insurance companies may not want to insure you as well. Due to the increase in medical costs and complexities, this is an absolute necessity. In addition, medical insurance offers a deduction of Rs. 25,000 (for Non-senior citizens) and Rs. 30,000 (for Senior citizens) under Sec 80D of Income Tax Act.Invest in National Pension Scheme (NPS): Opening an NPS account should appear high on one’s list of resolutions in order to not only save more tax this year but also provide for retirement. Invest only Rs. 50,000 as it is the maximum tax deductable limit that one can avail by investing in this scheme under the new Section 80CCD, over and above the Rs 1.5 lakh investment limit under Section 80C. Assuming an individual is in the 30% tax bracket, the resultant tax savings amount to approx. Rs. 15,000 from an investment of Rs 50,000. The only disadvantage currently (and we hope the government rectifies this) is that the amount is taxable on maturity. Hence, one should invest a maximum Rs. 50,000 because if one invests more, say Rs. 1,00,000 instead of Rs. 50,000, the tax savings will remain the same, i.e. Rs. 15,000, but the tax payable later, on withdrawal, will be on the entire amount of Rs. 1,00,000, which comes to approx. Rs. 30,000. In addition to the tax deduction, it is the cheapest of all pension products, such as mutual funds and insurance plans. Also, one would remain invested for the long term and benefit from the power of compounding, due to the restrictive liquidity in the product, rather try to churn investments regularly.The only disadvantage is that there is no liquidity till you attain the age of 60 and the withdrawal (60% of value) is taxable. Invest appropriately: People invest in equities for the short term in order to make quick and easy money whereas they invest in debt instruments like fixed deposits, PPF, bonds, etc. for a longer time. However, it should be the other way around, i.e. invest in equities for the long term and invest in debt for the short term as equity proves to be the best asset class over the long term as seen from the data below: Avg. Returns as on Dec 2015.Following these simple steps could go a long way towards realizing your goals.