Five Money Management Resolutions For New Year

• It enlarges your 'circle of competence': As an individual investor, you might have developed expertise in a certain area owing to particular qualifications or experience, and remained ignorant of certain other aspects of financial markets. A resolution plan could help you enhance knowledge in the field you might have left unexplored through the year. For instance, an investor with expertise of equity funds may have ignored tax saving mutual funds, perhaps out of inexperience. A resolution plan thus helps you to spend more time and effort on topics hitherto unexplored or ignored. 'Circle of competence' is a model developed by Warren Buffett and Charlie Munger, which defines limits of investors’ financial investments knowledge area. The model states that it is important to know your circle of competence and stick within it. The size of the circle is not important, however, knowing its boundaries is vital.

• It gives you a headstart: A resolution plan gives an opportunity to set financial goals at the beginning of the year – to specify your objectives, identify exactly which investment plans are suitable for you, and what it can achieve for you. Starting the year clear-headed thus leaves you ample time to focus on implementing the plan. Armed with this understanding, let us suggest five financial resolutions plans that would help you manage your finances systematically and achieve your desired financial goals in the New Year.

1. Move over bank deposits, include new-age capital market instruments

While savings has always been regarded a convention in our country, most of this money has been historically parked in traditional instruments such as bank fixed deposits. This might give good yields, but now investors can also look for alternate investment options.. Further, with the advancement of financial markets in the country, it is important that investors move with times and use new age capital market instruments such as mutual funds for their financial planning. Mutual funds not only provide investors with an opportunity to invest across the capital market such as equity, debt, and gold, they also provide additional benefits such a professional management, low cost, and liquidity.

2. Invest across asset classes

Different capital market asset classes do not move in tandem, but in tangents. Hence, it is important that, as an investor, you look at investing across asset classes. Such ‘asset allocation’ would be based on your risk return profile and investment horizon. If you have not spread your investments yet, make sure you do so this coming year. You could use mutual funds to spread your money across the major asset classes, based on your profile.

Past performance is no guarantee of future returns and may or may not the sustained in future. Green box denotes top performer in the period, while red denotes bottom performer among the asset classes. Nifty 50, Crisil Gold Index, CRISIL Composite Bond Fund Index and CRISIL Liquid Fund Index (collectively referred as Indices) has been used as proxy for equity, gold, long term debt, and short term debt asset classes, respectively. The above is point to point returns for the Indices. The aforesaid values are as on December 31 of the respective year.*- Data for 2019 are till Dec 30, 2019. Source of the data: Crisil Research

3. Make tax planning part of your overall financial planning

An often repeated mistake of most investors is to not include their tax investments in overall financial planning. Further, investors postpone tax planning to the last quarter of the fiscal year. Designing tax planning at the beginning of the year would actually help you to reduce tax outgo. You could invest through systematic investment plans into equity linked savings schemes offered by mutual funds over the long term to derive optimum benefits from their tax related investments.

4. Choose consistent performers

Most investors tend to look at short term performance while making investment decisions. This however, is not the right method. Instead, look for consistent outperformers. Recent good performance can be a one-off occurrence – the result of higher risk taken by the fund manager or just luck. Hence, consistency in performance should be the yardstick. Consistency does not mean a fund should be a top performer all the time, but consistently better than peers and the benchmark across market phases. Consistent funds give higher risk-adjusted returns vis-à-vis peers.

5. Review and rebalance your portfolio

Last, but not the least, track and review your portfolio on a regular basis. The former can be done easily nowadays with technological tools, the latter should be done at least annually. Check for non-performers or under-performers in all instruments. For instance, in mutual funds, compare the performance of schemes with the benchmark as well as its peers. If it is not doing well consistently (barring some aberrations), it is important to eliminate that fund and replace it with a performer.

Further, market forces may cause allocation of funds to shift beyond limits you are comfortable with. Rebalance your portfolio and make adjustments to remain on the goal path. For instance, if debt funds have not performed well, your portfolio may have tilted towards equities owing to difference in returns. Therefore, it is important to review the portfolio, either as a whole or in the new money flow, which is more efficient and less expensive (less costs, minimal tax incidence).

Summing up, financial planning through your New Year resolutions entails:

So make 2020 memorable by starting early, making investment decisions wisely and regularly, and staying market savvy! Have a financially sound New Year. Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the investment objective and associated risk factors of the mutual fund scheme before investing.