Most of us have never made an appropriate list of our financial goals due to which we are exposed to the risk of a mismatch
In the month of May in 2019, I was returning from Ahmedabad by Duronto Express. This was a non-stop train between Ahmedabad and Mumbai.
A fellow passenger wanted to get down at Borivali. However, he was not aware that the train wouldn’t stop there. He had two options, either to jump off the train at Borivali station, which was obviously a riskier option, or to travel all the way up to Mumbai Central and then make his way back to Borivali.
He opted for the latter and had to make arrangements to travel to Borivali. His time got wasted, money spent and energy drained. All because there was a mismatch between the station he wished to get down and the train he had booked.
Similarly, most of us end up making mistakes while investing. Years ago, a middle-aged couple called me up. They were living in a smaller city of Gujarat. From that city’s perspective, they were wealthy. Apart from the bungalow they lived in, the total value of their assets was about ₹5 crore.
The assets consisted mainly of real estate — in the form of a plot of land, two residential properties and a few shops. Of the ₹5-crore assets, only about ₹25 lakh of investment was liquid in the form of bank FDs, shares, mutual funds and other investments, which could be encashed immediately.
The rest was all in illiquid, indivisible real estate. The reason they called me was because they needed ₹47 lakh to fund their daughter’s forthcoming education abroad. They had two choices, either they could take an education loan or liquidate a piece of land costing approximately ₹90 lakh. There was obviously a mismatch between their financial goals and investments.
Most of us have never made an appropriate list of our financial goals — those goals for which we are saving and investing money. Because of this habit, we are unknowingly exposed to a mismatch risk.
Aim for optimum returns
All of us want to invest in instruments that generate higher, faster and maximum returns. Between an aeroplane and a bicycle, which one would travel higher, faster? Obviously, the aeroplane. However, if we were to travel to a place that is 3 km away, which one would be our choice of transport? Naturally, we would opt for a bicycle ride.
Hence, always focus on optimum returns and not on maximum returns. What’s the point in generating maximum returns if those are not going to be of use to us when we need them? Every time we invest, we should ask ourselves the question, “For which investment is this financial goal?” If the investment is not aligned to a financial goal, then unknowingly, we are exposed to a risk of mismatch.
Every year in the months of January, February and March, I receive a plethora of queries about investing in instruments that offer investor tax benefits. In reality, these are the worst months to invest for tax saving. Several financial products are unveiled to lure investors into investing during this time.
Due to lack of time, most people end up investing in instruments that are of no use to them. A 65-year-old widow without any dependents purchased a life insurance product by paying a hefty premium. A couple repaying a home loan invested in a five-year bank FD with lock-in. They were any way getting benefit for repaying the principal amount of the home loan.
Many salaried individuals exhaust their tax-saving limit when they contribute to EPF and pay school tuition fees for their children. They don’t need to invest more.
Senior citizens can consider investing in the Senior Citizen Saving Scheme. Families with a girl child can consider the Sukanya Samriddhi Yojna.
Our Income Tax Act is brilliantly enacted. If we plan at the beginning of the financial year and choose an instrument that would help us achieve our financial goals, we will surely find one that will help us with both tax savings and achieving financial goals.
We RIAs (registered investment advisors with SEBI) often joke, “Most people die in India in the month of Jan., Feb., March.” This is sarcasm. We say this because most life insurance policies are sold in these months to save on income tax.
Plan in advance
Someone rightly said, “If we fail to plan, we plan to fail.” Plan your investments, link them to financial goals, and give direction to them. Only then we will enjoy the fruits.
(The writer is a financial planner & author of Yogic Wealth)
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