Real Returns. Five financial resolutions for the New Year

Most New Year resolutions are made to be broken, but here are just five that can tone up your financial future.

Review and rebalance

The year gone by has been a forgettable one for your market-linked investments. When your portfolio is splattered with red, the temptation is to stop looking at it and treat it as a long-term investment. But if you’ve made some big investment mistakes because you were carried away by the bull market, time does not always play the great healer.

For investors who bought fancied infrastructure, commodity or power stocks in December 2008 and simply put them into cold storage, the last 10 years have brought nothing but pain.

Jaiprakash Associates, Suzlon Energy, Reliance Power and Shree Renuka Sugars — some of the most-bought stocks in the previous bull market — have lost 65-90 per cent for buy and hold investors. Many infrastructure funds are sitting on single-digit 10-year returns.

Allocating too much money to equities, going overboard on small-cap stocks and buying into sectors or themes that have topped the charts in the last three or five years are the big mistakes most of us commit when the bulls are in charge.

But the recent market correction offers you an opportunity to take off those rose-tinted glasses and re-evaluate if you’ve let greed overcome prudence. This New Year, log on, admit to your investment mistakes and correct them. Rebalance your equity allocations, prune your exposure to small-caps and switch from sector or thematic funds to a Nifty Next 50 fund.

Don’t idle money

Most of us put far more effort into earning our pay cheques than into investing well. A demanding work life can lead to us idling money in our bank accounts and postponing investing decisions.

Putting your investments on autopilot can help you ensure that your money is never wasting away at 4 per cent in a savings account. Add a sweep facility to your bank account to periodically sweep the excess into fixed deposits. Sign up for SIPs in liquid or short-duration debt funds so that you get a higher return with tax efficiency. Leave standing instructions with your bank for your insurance premia and tax-saving contributions. Wherever possible, opt for the growth or cumulative options over dividend or regular income options, to automatically reinvest your returns.

Step up your SIPs

You’re thrilled that your mutual fund SIPs have delivered a 15 per cent return in the past five years. But how much has that added to your net worth? If it is peanuts, you’re investing too little in SIPs.

Most of us begin our investing journey with modest SIPs of ₹1,000 or ₹5,000 a month. But if those fail to expand with your rising income, even great fund choices and blockbuster returns will make very little difference to your wealth.

A monthly SIP of ₹5,000 in an equity fund earning 12 per cent will get you to a ₹11.1-lakh corpus in 10 years. But stepping up that SIP by just ₹500 every year gets you to ₹15.1 lakh, 36 per cent more. Stepping up your SIPs ensures that your savings keep up with your lifestyle. They also make sure that financial goals such as retirement, which look so unattainable when you start out on your career, are within reach when you hit middle age.

Bump up your insurance

You bought your only insurance scheme — an endowment plan with a ₹25-lakh sum assured — because of a pesky insurance agent. You have been faithfully paying premium on it.

But has your insurance kept up with the changes in your life since then? A life insurance cover is not just supposed to compensate your dependents for the loss of your income in the event of your death. It is also supposed to take care of all the liabilities and financial obligations that you leave behind.

Therefore, your life insurance cover must rise directly in proportion to your income and lifestyle. It also needs to cover any outstanding loans and contributions towards family financial goals that you planned to fund during your working years. Accounting for all this, you may find that even a ₹1-crore term cover is inadequate to cover all the bases.

Use an online insurance portal to calculate and sign up for a pure term cover that will truly protect your dependents.

Nominate

You’ve got your financial goals all mapped out and have earmarked investments for each one of them. But have you thought of what would happen to these investments if you weren’t around to track or cash them?

Updating your nominee details on all your investments makes sure that they don’t fall into the wrong hands after your death. Nominees need to be appointed for your bank accounts, bank lockers, properties, demat accounts, shares, bonds, mutual fund schemes, NPS (National Pension System), EPF (Employees’ Provident Fund) and post office accounts.

It is never too late to do this; financial firms allow you to add or change nominees later, too. A nominee holds your investments/assets in trust immediately after your death, until it can be distributed to your legal heirs. Appointing the beneficiaries of your will as your nominees can simplify the transition.

Don’t just stop with making the nominations, though. Give your nominees a written list of all your investments, email and bank account details, so that their financial transition isn’t as painful as the emotional one.

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