Financial Planning: What are the tips that may help in long-term investments?

Financial Planning

The falling interest rates, increased volatility of the stock market, and the high gold prices can throw many a portfolio in a panic. Investors who have been banking on fixed coupon payments are seeing their returns reduce, the incremental returns from Nifty and Sensex seem to be reduced at the moment making equity trickier than usual. That said, this turmoil is short-term in nature and you should still be able to work towards your long-term financial goals. Here are a few tips to help you with that.

Long-term investment horizon

It is important to have a long-term investment horizon and stay invested to let compounding work its magic. Further, over the long term, your investments not just become more tax-efficient they also face reduced capital risk. Therefore, it is important to continue investing through systematic investment plans and into instruments that are fundamentally strong even through a volatile market. This is especially important as the highest interest on FD and other fixed-income instruments gets capped. 

Risk tolerance

You should have both your short-term and long-term goals well-defined. It is important to remember that just because an investment carries a higher risk, it may not provide a justifiably higher return. When markets are volatile, it is important to be conservative about your short-term goals. Many investors tend to believe that they can time the equity market to get higher returns or invest in small- and mid-cap companies to make quick money. Both of these approaches are generally not the best way to manage your investments and can be especially punishing in volatile markets. 

Diversify debt funds

As the highest interest on FDs and other fixed-income instruments gets capped, and the average return falls – it is important to lock into the current interest rates offered. To do this invest in FDs with longer maturity. Depending upon your short-term risk tolerance, you can also look to invest in short-term funds. Invest in debt instruments with varying maturities, increasing the ones with a longer maturity, to ensure that you are shielded against future dips in the interest rate offered.

You could look at small saving schemes including a 5-year National Savings Certificate, post-office monthly income scheme, Kisan Vikas Patra and even post-office fixed deposits to further diversify your debt funds. You could also look to purchase bonds from state-owned corporates over the secondary markets. The interest payments on these bonds are tax-free, but remember that you will have to pay a capital gains tax if you choose to sell them before maturity.  

Simplify portfolio

This is a good time to simplify your portfolio. Take a hard look at your investments and don’t hesitate to exit a few to cut losses. Your portfolio in a volatile market should ideally be a mix of mutual funds with a proven track record, hand-picked listed stocks with strong fundamentals and tax-free bonds. Make sure that you have enough cash to meet your liquidity needs, and redemption costs to meet any near-future liquidity requirements should not erode your savings. Protecting your capital must be in the forefront of your investment philosophy when the market declines.