As we step in to the new financial year, there are certain essential tasks that we must perform in the beginning, so that our financial matters remain stress free for the rest of the year. Here are four such unavoidable tasks:
Review your savings rate
Savings rate is one of the most critical driver in wealth creation. The thumb rule is to have a minimum savings rate equivalent to your age. For instance, if you are 38 years old, you should save a minimum of 38 percent of your income. The higher, the better.
If it's less, it is important to understand why it's less. Maybe because your discretionary expenses or your equated monthly instalments (EMI) are too high. Perhaps you had some emergency, and your emergency fund, if any, was not sufficient. There can be multiple reasons, which one needs to address.
Review your financial goals
You should review your goals for the following things:
- Goal priority: If there are any changes in the priority, the goals need to be reprioritized accordingly. Or you may have a new financial goal that needs higher priority resulting in de-prioritizing other existing goals. E.g., buying a house may become a higher priority than buying a car.
- Goal target: It's essential to understand if any external event has significantly changed the goal target. For example, a higher inflation may have pushed up your education fund requirements, higher.
- Goal status: Need to understand if you are on track to achieve your goal in the desired time. If not, necessary changes in the portfolio or investment amount are required.
Based on your risk profile, you would have decided to have a mix of equity, debt, gold, and real estate. However, these may have changed during the year because of market events. E.g., in the below table, one can see that equity has increased to 59%. Therefore, it's essential to rebalance the portfolio and move back to the original asset allocation as per your risk profile.
Review your emergency fund
Emergency fund size should ideally cover six months of your expense. It could even be built to contain 12 months’ worth of your expenses. However, when you review, you may realize that your expenses may have gone up due to purchasing a new car or new born, etc. Also, it may have been reduced due to the closure of a loan or conscious reduction in discretionary expenses. Therefore, you must recalibrate your emergency fund to align with 6 months of your updated expenses.
There are two fundamental ways in which one can save more and spend responsibly and should be practiced in the new financial year:
Can’t control your expenses? Just automate your investments
Most of us invest, after spending our money. Which is why we have very little left to invest, eventually. Change your mindset from "Income - Expense = Savings" to "Income - Investments = Expense" mindset.
And to make this happen, start automating your investments from income. Once income comes, investments should be automatically deducted and parked in investment products before any expense commences. If SIPs cannot be automated, the more straightforward way is to deduct investments from income and park them in a separate savings account from where you may make investments. This practice will ensure that you spend only with what is available and not at the cost of investments. In addition, this has a multiplier effect if practiced diligently.
Leverage secondary income
Another smart way is to work on secondary income like passive income from investments, earnings by pursuing your passion, etc. The most significant benefit is that your savings rate increases substantially, which means that your path to financial freedom is shorter.
Should you invest in passive funds, in 2022-23?
The mutual funds industry has seen a growth of passive funds, that is index funds and exchange-traded funds. The collective assets under management (AUM) stands at Rs 5.3 lakh crore in Feb 2022; a compounded growth of 70 percent over the last six years.
The share of passive funds in the Indian mutual fund industry has gone up from 0.8 percent in February 2016 to 14 percent in February 2022. In mature markets such as the US and Europe, passive funds enjoy a market share of 40%-50% in the mutual fund industry. India is joining the global party with a market share of passive funds supposed to reach a commendable 37% by March 2025. Further, globally, research has shown that passive investing is the most reliable way to grow your money over the long term. Therefore, investors should latch on to this opportunity to make passive products part of their portfolio to achieve their financial goals, thereby improving their lifestyle over the long run.
Emergence of crypto as an asset class
The biggest story of the post-pandemic era is the mass mainstreaming of crypto assets. Crypto investing in India has seen a mind-boggling growth, with an estimated crypto owner base of 10.07 crore in 2021.
Recently, the government brought crypto assets under the taxation ambit in the budget for FY 2022-23. For those who still feel compelled to invest in cryptos, there are tons of crypto exchanges that facilitate investments. Some exchanges even have baskets, which work like ETFs.
With regulations tightening around cryptocurrencies, there could be increased inflows into this new asset class, from traditional stock market investors. However, investors should understand that crypto is a high-risk product and should invest wisely. It's ideal to have crypto exposure not more than 5-10% of your portfolio.
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