Everyone wants to simplify their lives, especially their financial lives. If you’re going to get started with planning your money matters or focus on the essential things and reduce the clutter, you have come to the right place.
Itâ€™s important to build a solid financial plan because it helps you reach your financial goals and provides security for you and your family.
While investing and buying in the right financial instruments for your portfolio is important, having all the elements in place is also essential. If you are serious about long-term wealth creation, it is essential to pay attention to these five aspects: emergency fund, equity funds, diversified portfolio, term insurance and health insurance.
Let us look at these elements one by one:
An emergency fund is a must-have. You never know when a major expense could hit â€” you need your car repaired, or someone in your family is sick and needs expensive medical treatment. You could lose your job and have no income for several months.
In these circumstances, an emergency fund will come to your rescue.
You should always keep at least six months of your monthly expenses in liquid assets. It means maintaining cash or putting money in a savings account or liquid fund, which you can access easily.
However, the amount of funds you would want to be parked in an emergency fund would depend on your current liabilities. If you are fresh out of college and have started working, you may not need to park as much money as someone who has elderly parents and dependent children to look after.
If you have dependents, existing loans, the ideal size of your emergency fund can be between 12 and 18 times your monthly expenses. For example, if your monthly expenses are Rs 1 lakh, your emergency corpus should be between Rs 12 lakh and Rs 18 lakh.
It is essential to have emergency funds; you cannot ignore equity funds. Equity funds help you plan for your long-term financial goals. Equity funds are essential as these funds have the potential to give higher returns than the other asset classes over the long term. This helps in wealth creation, as these funds may offer higher returns than the inflation rate.
Equity funds are a great investment option to fulfil goals at least five years away.
Even if you don’t have financial goals right now, everyone should start investing in building a retirement corpus, irrespective of income.
There are different types of equity funds with varying risks. Large cap funds, mid-cap funds, small-cap stocks, sectoral funds are some examples of equity funds. Large cap funds are less risky than sectoral funds. So, you can invest in equity funds depending on your risk tolerance.
If you are new to equity funds, a large cap index fund might be a good option for you. You can become familiar with equity funds and invest in other equity funds.
You must diversify your portfolio and avoid concentration risk. If you invest all your money in one investment option, then if that investment goes through a rough patch, it will hurt your returns tremendously.
Diversifying across asset categories means that the impact of volatility on the overall performance of your portfolio will get reduced because when one asset category is down, another one will be doing well at the same time. So, it is crucial to diversify your investments across debt and equity assets. At the same time, within each asset class, you should diversify across different categories of products. For example, if you invest in equity mutual funds, invest in large-cap funds as well as mid-cap funds. Investing in large-cap funds alone means that you are putting all your eggs in one basket.
A diversified portfolio can help you achieve financial stability as it helps spread the risk across different assets. It will help make sure the volatility in the market does not adversely impact your investments. By doing this, you are minimizing the potential risk of losses.
If you have dependents, having term insurance is a must. A term plan offers financial protection to the policyholder’s family in case of an eventuality, such as death or disability of the income earner.
Term insurance is one of the best ways to protect your loved ones against any financial crunch caused because of your death, disability, or critical illness. It pays out a specified amount to your family if something untoward happens to you.
Health insurance is extremely important for you and your family members. In this day and age, when the healthcare expense is skyrocketing, health cover can help in the event of any disease or serious illness and save you a lot of money. Depending on your needs and budget, you can either get a health cover for yourself or your entire family.
To make the most of your investment portfolio, you need to focus on building your assets, growing your earnings and preserving your wealth. This process requires research and planning in addition to having a diversified portfolio for minimizing risk, re-balancing of your portfolio, and purchasing term insurance for protection against unforeseen circumstances. Your health maintenance should also receive a top priority, since there are no assets more important than your health.