Five decisions you should not delay in your investment journey

“Most of the other decisions that we make are linear whereas investment related, especially decisions related to appreciating assets, they tend to be cyclical and I think it is important that you have somebody who has seen some cycles in this market, he has understood the ups and downs in the market,” says Bharat Phatak, Director, Scripbox.

Investment involves a lot of decision making, but then let us talk about five crucial decisions that you should not delay at any cost whatever be your investment journey. What is the first step coming from you?
I feel having a financial advisor or a trusted person who will guide you through the investments, it need not necessarily be a person, it can also be from digital sources, but it is important to have somebody’s experience who has seen the cycles and delaying this decision can cost you financial objectives which are not clear, lack of expertise, missed opportunities, so I think advisor zaroori hai and it is important that instead of trying everything on your own, the first foundation can be led by having a good advisor, a certified financial advisor or a certified mutual fund distributor on your side. But then one crucial aspect is how can you just trust someone with their money? It is a very important selection that you have to do and so what are the qualities that one should be keeping in mind or maybe assessing based on these factors, there is a lot of trust that is going to go into this person, what are the qualities that one should look at when finalising a financial advisor or a planner?
Most of the other decisions that we make are linear whereas investment related, especially decisions related to appreciating assets, they tend to be cyclical and I think it is important that you have somebody who has seen some cycles in this market, he has understood the ups and downs in the market.

So, they say history does not repeat, but it rhymes and somebody who can give you lessons from the history. Also, you can look at references so that if your friends, if your relatives they have found a trusted advisor who has helped them for 5, 10, 15 years that is something which is useful.

The next step coming from you is to buy life and health insurance, very important but then I think here what you also need to guide our viewers with is the kind of right life insurance and the right health insurance.

Absolutely right and the right kind of insurance is required and delaying insurance is not a good idea because you never know when the unexpected hits you. So, I think life insurance, accident insurance and health insurance are the three main things that you should have. In life insurance, term insurance is a very practical approach because you can get this insurance through composite products which combine investment and insurance also but then the obligation to pay a much higher premium is what you sign up for.

Instead of that, term insurance taken at a young age can give you a very high cover. I mean, one crore cover may be available for even 15-20 thousand per year. So, it may be like a cost of even ordering one pizza for a month, you can get a very large cover, 50 lakhs, 75 lakhs, 1 crore, so term insurance started at the early age.

In case of health insurance, you need to see the family conditions, the various family floating covers which are available and different members of your family who need that cover, so this will be useful in case of some elderly members are there in the family and nowadays, what we find very useful are top up and super top up covers because you may have a certain coverage under your employment or you may already have a policy which was taken five-seven years ago but now with inflation the cost may go up, the new advances in medical field the cost may go up and you need not get a new policy but you can say that if I already have a policy of five lakhs, I will take a new policy which is a top up, which will cover me up to 20 lakhs but the first five lakhs will not be covered by this new top up policy.

What is the third tip coming from you?
Setting up an emergency fund, so do not delay yes, because I mean, typically it is a good idea to have six months to one year of expenses.

What exactly is an emergency fund?
Suddenly some unexpected expenses may come up. So unexpected guests, unexpected illness, change of job these are typical things which can confront you and in that case if you are covered for 6 to 12 months of your monthly expenses, it will give you a cushion to handle these variable situations in your life, the unexpected ones. If you delay creating an emergency fund, it may force you to borrow and I think that is something which one can definitely avoid. It gives you a lot of peace of mind.

Now next tip coming from you is about saving for your retirement. So thinking of your retirement goal very early in your age does not come naturally, which is why one needs to consciously make a decision for that. But how do you go ahead? How do you assess what will be the corpus required, you know, 30 years, 40 years down the line, if someone is in their 20s and maybe want to just have a goal based strategy? It is quite difficult to analyse and think about the retirement phase at that particular age.
Actually, I will take this in two stages. One is this is where the first point which we made that having a planner or an advisor who will help you in making this projection. So that is point number one. Point number two is there will be a different criteria based on which this retirement planning can be done.

The first will be the age at which you would want to have a freedom to retire. So it does not mean that you actually retire at that age but you have the independence to say that my portfolio can take care of me. And I can choose the work rather than being forced to do whatever work comes my way. And here, if somebody says that today my age is 30 and I want to have this financial freedom by the age of 50, then it is possible to look at the past and make a projection of what kind of returns equity will give me, what kind of returns debt will give me. And at what rate my expenses will go up. I will also have to factor in the lifestyle upgrade which will happen over the next 15-20 years. And I think there is a complexity involved and this is where your advisor or your distributor will be of help.

The last tip is have a portfolio which has diversified strategy.
Conventional wisdom says do not put all your eggs in the same basket and I think the same holds true in case of your investment portfolio also. So one of the things is my short-term needs, medium-term needs, long-term needs will require different instruments. My short-term needs, as we discussed, the emergency fund, will have to be in simple and liquid income earning investments. The medium-term can go into bonds but over the long run, I will need to put money in appreciating assets.

Within that, my choice is equity or equity mutual funds but people will also look at gold, people will look at real estate. So these are appreciating assets. And all these also go through cycles so allocating to different asset classes who move in little different directions. So the correlation between gold and equity could be low, correlation between real estate and gold could be low. And based on this, my portfolio becomes much more stable if I put money in different asset classes. Also, hand-in-hand comes the question of rebalancing.

One asset class which does very well, at the same time, the other asset class may not do well. And if I rebalance my allocation at that time, it will help me harvest the gains in the asset which has done well and also buy something which is a little out of favour. So I think diversification across uncorrelated asset classes is important. And this is all the more important for long-term goals. But even for short-term goals, if you are putting money in any credit risk type of situations, then it is important to diversify and not put all your eggs in the same basket.