You need a disciplined approach to manage your personal investments. You need to make timely decisions such as whether or not to invest in tax-free bonds, lest it get oversubscribed.

But taking investment decisions can be tiring amidst a busy professional life. It is in this backdrop that default choices are useful for making personal investments. Here is how you can create such default rules.

Why default choices?

You should be in a good decision state to attend to your personal investments. This means you should be physically and emotionally well-prepared to take decisions. More often than not, you will take your personal investment decisions during weekends. And if you work at a busy day-job, you may be physically and emotionally drained during the weekends. This could impact the quality of your personal investment decisions. So, what should you do? We suggest that you set up default choices. By defaults, we mean that your investment choices should be automatic unless you intentionally choose an alternative. But why create default choices?

You tend to get confused when faced with choices. This sets you on a deliberative mode: Will a fund perform better than its peers? Or will it be less risky than its peers?

With many questions to consider, you are unlikely to take a timely investment decision. If you create default choices, you have to only implement the default option rather than deliberate on the available choices.

And to fit with your busy work schedule, you can even automate your implementation process. Then, there is the behavioural reason. Defaults can help you moderate regret.

How? Because you can set up default choices as an automatic process and distance yourself from the investment decision, leading to less anxiety and emotional stress. So, how do you set up defaults?

Creating default choices

We will assume that you need a portfolio containing only stocks and bonds. First, your default choice should be set up at the portfolio level.

This means you should set up a default savings rule. Your default savings rule would apply at two levels — at employment and outside it. Default choice at employment can be in the form of voluntary provident fund (VPF). This is easy to implement; you can simply instruct your employer to deduct a higher-than-regular amount from your salary every month.

Outside employment, you can set up default savings rule through your investment account linked to your savings account. This comes in the form of automatic debit instruction issued to banks to allow systematic investments in mutual funds.

Second, your default choices should apply for investment products. Your default debt investments could be fixed deposits with public-sector banks and tax-free bonds issued by Government enterprises. Your default equity investments could be index funds — both large- and mid-cap. You can, of course, substitute exchange-traded funds (ETFs) for open-end funds. There is a reason we want to you set up simple default choices. You have to have sound reasons to choose alternatives such as buying active mutual funds or investing in fixed deposits with non-banking companies.

And that would require you to switch to the deliberate mode — break the inertia and use your weekend leisure time to employ your cognitive skills to take decisions. Will you?

Default choices on investments are good, but could be unhealthy on spending. Why? It is better to deliberate on your spending decisions — whether to increase or decrease your discretionary expenses, and whether to use credit cards or pay cash for non-discretionary expenses.

By making deliberate spending choices, you slow down your implementation. This can prevent you from splurging and stretching your monthly budget.

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