Last Updated on October 10, 2020 by Gopal Gidwani

Global trade and commerce have faced severe jolts and disruptions following the Covid-19 pandemic. This has opened up conversations worldwide about the need to be self-reliant as economies struggle to get back on their feet. On May 12 this year, PM Narendra Modi gave a similar call to the nation to go VocalforLocal and become more self-reliant as an economy under the Atmanirbhar Bharat Abhiyan. The aim here is to promote and buy indigenous products and encourage local manufacturing of goods and services that are otherwise imported from other countries.

This theme of being ‘Atmanirbhar’ or self-reliant can also be applied to investment planning. Being self-reliant or independent financially is what every individual should aspire for. Such independence only comes from having a well-defined financial plan which not only helps in achieving your financial goals and long-term wealth creation but also helps to deal with short-term volatility and other risks.

Here are a few tips that can help you be well and truly financially independent:

Set clear financial goals
Setting short, mid or long-term financial goals is an important step towards financial planning. Planning for any type of journey begins with finalizing the destination. Likewise, before starting an investment journey, it is important to first identify the financial goal, the target corpus and the time period within which you aim to achieve this goal. Based on this, you will then choose the asset class (or classes) to invest in.

For instance, if the financial goal is a long-term plan of say 10 years or more for the purchase of an asset (land, house or apartment), then your financial plan will primarily constitute equity investments as equity is best suited to deal with short-term volatility and helps in creating wealth over the long-term. If the plan is a short-term goal such as planning a vacation or buying a gadget, then debt mutual funds are best suited as they ensure capital protection with reasonable returns.

An ideal investment portfolio consists of different asset classes in varying proportions based on investor goals, risk appetite and the time period required to achieve the goal (known as investment horizon). This spreading of investments across asset classes is known as an asset allocation mix.

Monitor your expenses
A famous personal quote by Warren Buffet goes “Do not save what is left after spending, but spend what is left after saving”. This means you need to keep a close watch on what and how you spend and save (if at all). To start with, identify a certain monthly amount and set it aside for savings and investment; a general rule of thumb says save and invest about 20% of your income.

Along with it, monitor expenses by keeping a physical record of inflow and outflow of money using an expense tracker like a diary or a phone app. This may seem like a tedious task but it will also help prioritize your needs and curtail unnecessary expenses.

Reduce Debts
Strategically reducing or paying off your debts such as any loan, credit card bills, money owed to family or friends, etc. is crucial to good financial planning. Most commercial debt such as loans and credit card bills charge high interest rates which compounds and increases your overall monthly EMI outgo. To avoid this trap, use a portion of your savings to settle some of these loans, even if in part. Repaying even Rs. 25,000 in a home loan worth Rs. 20 lakh can help reduce the total number of EMI installments!

As a thumb rule here, start with your short-term debts as these charge the highest interest rates such as credit card bills, personal loans, among others. Pay these off first before moving on to any medium and long-term debts you owe.

Invest in Mutual Funds
Planning to save for a financial goal can be daunting especially the task of choosing the right investment product. Mutual funds can help put this dilemma to rest as they cater to different type of investors with a range of products that includes various asset classes.

Equity mutual funds can help in achieving long-term investment goals while debt mutual funds can help plan for short-term goals. Then there are hybrid funds which invest in both equity and debt (and sometimes even in gold and other asset classes) for investors who are looking at a 3-5 year goal and want capital protection along with returns higher than the average debt product. There are also solution-oriented mutual funds such as child benefit plans and retirement plans.

Also, mutual funds are professionally managed by fund managers who are financial experts who actively manage the scheme to give the best possible benchmark-beating returns to investors. This saves an individual investor the trouble of monthly, weekly, or even daily monitoring of their investments.

Portfolio Rebalancing
As mentioned earlier, mutual funds do not need to be monitored on a daily, weekly, monthly or, in some cases, even yearly intervals. But they do need to be reviewed and rebalanced from time to time. This rebalancing helps to identify non-performing schemes which could be replaced with better performing ones.

Short-term market fluctuations can increase or decrease the value of investments which over a long period of time can change the asset allocation mix. Therefore, periodic rebalancing of portfolios can help reset the asset allocation mix to appropriate levels. However, the frequency of portfolio review and rebalancing would depend on the investor’s financial goals, risk appetite and investment horizon. It is best to consult a financial advisor who can help with this.

So, while the country aspires to be more Atmanirbhar, you should also aspire to be financially independent and build your wealth by being more prudent with your investments and savings. Financial independence is the need of the hour to deal with unexpected financial emergencies such as the one we are going through with the COVID-19 pandemic. So prepare, think smart and invest smart.