One of the most common mistakes people make during goal-based financial planning is ignoring inflation, said Kirtan Shah, Founder and CEO of Credence Wealth Advisors, while speaking about dos and don'ts in financial planning to CNBC-TV18.
"The biggest mistake people make is prioritising investment planning over risk management in terms of personal finance.
Term insurance is the best way of life insurance. Term insurance value should be around 10-15 times more than annual income. Also, it's imperative to declare any kind of health condition or habit while buying insurance," said Shah.
However, the insurance may not cover every expense during your admission to the hospital. It is crucial to keep a contingency fund ready for such cases, the CEO added.
"Goals must be realistic, don't run after extraordinary things," Shah said.
There should be a clear timeline for achieving the set goals. Else you won't be able to generate desirable output, and it also brings discipline to investing, Shah opined on goal planning.
Starting late will cost you in terms of higher savings rate
Speaking on the repercussions of starting late, he said, "The more you push your investment to a later date, the more you are making your financial goals harder to achieve."
Starting early can help achieve even bigger goals
Simplifying the concept of the importance of starting early, he gave an example and said, "Let's say if you're looking at accumulating Rs 5 crore at the age of 60. Assuming that you will gain 10 percent on your investments, and if you start at the age of 25, the SIP per month would be roughly Rs 15,000 per month."
"However, if you delayed the investment by merely 10 years and started at the age of 35, then the cost of SIP per month will increase exponentially up to Rs 40,000 per month for the same goal. Starting late will cost you in terms of higher savings rate," he added.
Golden rules for the asset allocations, according to Shah:
- Diversify the asset classes you are investing in. Never put all eggs in one basket.
- Maintain a ratio of 30:30:30:10 - 30 percent for EMI, 30 percent for household expenses, 30 percent for saving and 10 percent as liquid funds.
"However, if you are young and don't have EMIs to pay, try putting the 30 percent for EMI in savings instead- along with the 10 percent of liquid funds. Aim for spending only 30 percent of your income," Shah said.
Investing is going to make you wealthy, not trading
Talking about equity investment, he believes that "equities are long-term investment products". Thanks to social media, people have started to believe that it's a short way of earning 1-2 percent a week, which is not the case if you don't understand how to do it right, Shah claimed.
In case you don't understand equity, it's best to stick with mutual funds, where the investment manager takes the call. Talking about fixed income, Shah doesn't believe that any investment is risk-free. However, in terms of three years or more, debt mutual funds are better than fixed deposits if you can avoid looking at the daily net asset value (NAV).
Fixed deposits have a risk of you losing your money if you withdraw before the lock-in period, high taxes on return and it also fails to combat inflation, according to the expert.
"In terms of real estate investment, buying properties doesn't make a lot of sense in terms of returns. The rent for residential property is hardly 1-2 percent, and a commercial place will give around 6 percent return as rent. However, REITs are one of the feasible ways to invest in real estate," he added.
The best route to invest in gold is through Gold ETFs and sovereign bonds by the government, the expert observed.
PPF and ELSS in mutual funds are the best way to invest for taking benefits of 80c tax benefits, he added.
"Any kind of higher return investment tool will also have a higher risk. It's up to the investors whether they're ready to take the risk or not," Shah noted.
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