Is Your Portfolio Right For You?
We are all aware that eating a balanced diet is essential to good health. What is easy to forget is the fact that the right diet for you may not be the right diet for me. Age, gender and health issues dictate the proportion of nutrients essential for a balanced diet.
Just like you determine the right proportion of nutrients to keep yourself physically healthy, you need to determine the right asset allocation for your portfolio to stay financially healthy.
Are you physically and financially healthy?
As individuals, we are conscious of the fact that how being physically healthy and fit is necessary these days. But if you have a poor way of managing finances or have a huge debt, it can take a toll on your health, resulting in stress, anxiety, or depression.
Good well-being contributes to a healthy financial status. Have you ever realized how financial and physical health are interconnected? Many experts also prove that financial and physical well-being go hand-in-hand. And with that being the case, let us delve deeper to understand the connection between the two.
When it comes to fitness and health choices, you always tend to set our goals, such as building muscles, decreasing body fat, eliminating sugar, getting more sleep, among others. Based on any of these goals, you arrive at a plan that will help you to achieve them.
Similar is the case with your financial health. You need to define goals that you would like to achieve in the near and distant future. Goals like going on vacation this year, buying a car in 3 years or creating a higher education fund for your child.
Another aspect of financial fitness is being ready for any curve balls such as losing a job, challenges in business or losing the only income-earning member in your family. Such losses can be tragic, but with a better monetary approach, it can bring peace of mind both financially and physically.
Below are some helpful tips that will help you get closer to physical and financial wellness:
Dealing with debt: Mounting debt, especially when you're struggling with repayments, can easily put you in stress. It is imperative to create an action plan and proper savings in place to reduce the stress burden.
Start investing: Whether you have a long-term or short-term goal, you should start investing, either in market-linked or non-market-linked products. Investments will help you create generous corpus and finance your goals. Contributing to investments regularly over time helps even out market risk.
Start saving: Saving money can be challenging, especially when you have a debt to pay off and other expenses. It is necessary to save from your regular income first and then use the rest amount for spending. Savings will help you keep a buffer in case of emergency, and you can rely less on your credit cards or small loans.
Fill the risk gap: You are the biggest asset if you're the only bread-winner in the family. But what if you've met with an accident that compels you to stay away from work for long-term? Uncertainties can strike anytime; hence you need to fill the risk-gap by securing yourself and your family with personal insurance policy. This will at least keep you and our family financially afloat.
Seek the help of financial advisor: Like for physical fitness, you may seek personal trainer, similarly, for planning financial goals, you can take advice from an investment expert. The expert can help you define goals, set parameters, suggest investment options to meet your goals.
Determining if your asset allocation is right for you depends on the following factors:
Goals: What are your goals?
When you create a nutritional plan you always have a goal in mind. Goals like 'building muscle'. This knowledge helps you create a high protein plan that should help you achieve your goal of building muscle.
Take a few minutes and chart out your investment plan. List down the financial goals that you would like to achieve in the near and distant future. Goals like going on vacation this year, buying a car in 3 years or creating a higher education fund for your child.
By taking this simple step, you can create an investment horizon that can help you shortlist what type of funds are right to achieve your goals.
Investment Horizon: When do you need to achieve each goal?
Knowing your investment horizon can help you determine what type of funds aligns with your goals. This is an essential step. After all, if you don't eat the right nutrient 'protein' you won’t build muscle. If you don't have the right assets 'schemes' you may not be able to fulfill your goals on time.
For example, if your goal is to take a vacation this year, you should probably choose a Liquid fund that is relatively less risky, may generate reasonable returns and has high liquidity
If your goal is to buy a car in 2 years, you can probably choose a Liquid or Debt fund that has a low risk level.
If your goal is to create an education fund for your 5 year old that is accessible in 12 to 15 years - you should probably choose an Equity fund that may offer long term capital appreciation and may help you beat inflation.
Risk Capacity: How much risk should you take?
Your risk capacity is similar to your immunity system. When you are a young adult it is strong. You have the capacity to work all hours of the day and eat junk from the street without falling ill. As you grow older, your ability to eat anywhere without falling ill - gradually gets lower.
Your investment journey follows a similar path. To potentially be successful, you need to re-balance your portfolio's assets as you move through life's stages.
Stage 1: Young & Dependent Free
At the start of your career, you may not have significant amounts to invest but you do have the capacity to take risk. Maximize growth opportunities with an aggressive high-risk investment strategy, you can potentially earn high rewards.
Stage 2: The Family Man/Woman
Once you have settled down and begun a family, you need to be more conscious of taking risks. You should modify your growth-focused investment strategy to include consistent and low risk assets.
Stage 3: The Golden Years
After you retire, your investments become your source of income and makes security a priority. You should move to a low-risk investment strategy.
As you can see, the path to good health - physical and financial - is a life-long journey. You have to keep balancing and rebalancing your diet and assets to achieve your goals.
Start today to get physically and financially healthy!
An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund
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