Credit Risk Funds – Higher risk associated with higher rewards!

Novice investors or those with a lower risk appetite look for more risk-free and stable options like a diversified mutual fund. However, seasoned and experienced investors usually look to increase their risk appetite to earn a little more returns. There are numerous investment instruments that are capable of giving higher returns than others but demand a higher risk appetite. One such high-risk, high reward investment instrument is the credit risk fund.

Understanding Credit Risk Funds

When you invest in mutual funds, your invested capital is divided into equity funds, which includes investing in the stock market, while debt funds, which is a fixed-income security that deals mainly with bonds. Bonds are given ratings based on the credit quality, the issuing company’s financial strength, and the company’s ability to pay interest and repay the principal amount of money. These ratings are denoted as AAA, which is the highest, then AA, A, BBB, BB, B and so forth.

Credit Risk Funds are debt funds that mainly invest in bonds that are rated either AA or lower. To be more specific, These invest about 65% of the funds available to them in lower than AA-rated bonds. Since these bonds do not have the financial strength of higher-rated bonds, their interest payments and principal repayment are not stable. Hence the name Credit Risk Funds.

Credit Risk Funds vs Corporate Bond Funds

Most debt funds are not the same in terms of their risks and returns. Let us compare Credit Risk Funds with Corporate Bond Funds for you to get a better understanding :

Credit Risk FundsCorporate Bond Funds
A debt scheme that has to invest a minimum of 65% of its available funds in bonds rate AA or lower.A debt scheme that has to invest a minimum of 80% of its available funds in bonds rate AAA
For high risk appetite investorsFor low risk appetite investors
Higher ReturnsLower Returns

How do Credit Risk Funds Generate Returns?

Credit Risk Funds reward their investors for the extra risk they are ready to take by investing in lower-rated bonds (AA and lower). Because these invest in lower-rated bonds, the bond issuer pays more interest to the Mutual Fund, who pay a higher interest rate to their investors. Secondly, if and when these bonds become better rated, the capital gains achieved can be high, and the investor gets higher than normal returns for their investment.

Are Credit Risk Funds safe and who should invest in them?

Investors with a higher risk appetite are the ones who should be investing in these funds. Despite being a kind of debt fund, Credit Risk Funds have high associated risks. It is entirely possible that instead of the bond ratings improving, they may even go further down. This volatility is part of these funds, and only those investors with a high appetite for risk should invest in credit risk funds. Investors looking for low-risk and stable investments should avoid these funds.

SEBI Measures

In recent times, SEBI has taken multiple measures for the safeguarding of retail investors. SEBI has mandated credit risk fund issuers to invest 10% of their total assets in liquid assets such as Government securities, bonds, cash, etc. The move will help enhance the liquidity of credit risk funds which will help them face pressures if any. This move by SEBI has resulted in 2 outcomes :

  1. A rise in the liquid holding of Credit Risk Funds : The table below can demonstrates that the Credit Risk Funds have increased their liquid holding much higher than the 10% threshold mandated by SEBI.Rise in liquid holdings of Credit Risk Funds
  2. Reduction in Credit Risk Fund issuers : Many credit funds have reduced their issuer concentration. So, now the percentage of net assets held by the top three and top five issuers has gone down. It has made the credit risk portfolios more diversified, thus reducing the risk for investors.Drop in Credit Risk Fund issuer concentration

These measures have resulted in the Credit Risk Funds being much more diversified, making them suitable for even more investor classes.

Understanding Taxation

Since credit risk funds are a type of debt funds, they are taxed as short term capital gains for up to three years and as long term capital gains for periods of more than three years. The short term gains tax is dependent to the income tax slab of the investor. The long-term gains tax for debt funds is fixed at 20%.

To Conclude Things

In conclusion, credit risk funds can be an easy way to earn higher than normal returns by investing in lower-rated bonds. But, as is the case with almost all forms of investments, if the potential for profits is high, the associated risks are high as well. If you are willing to take those risks to get excellent returns, then these credit risk funds might just be your cup of tea. However, it is advised that you do extensive research about the issuing company and the available bond options before investing in Credit Risk Funds.


Sukanya Samriddhi Yojana – An easy way to secure your daughter’s future by the age of 21

Sukanya Samriddhi Yojana is a saving scheme launched by the Government of India aimed at the betterment of girl child in the country. Sukanya Samriddhi Yojana is launched to provide a bright future for the girl child and enables parents to build a fund for the future education and marriage expenses of their girl child from a young age.

What is Sukanya Samriddhi Yojana?

Sukanya Samriddhi Yojana was developed under the government’s ‘Beti Bachao, Beti Padhao’ initiative, it is a welfare scheme designed for the girl child. Investing in this child insurance plan allows their parents or legal guardians to ensure financial security for a girl child aged ten years or below. Under this scheme, an account in the name of the girl can be opened across any private and public sector banks for 21 years. The tenure of investment under the SSY scheme is 21 years, starting from the account’s opening date.

This deposit scheme can help you save regularly for your little girl. By making small to large deposits on a regular bases, you can create a sufficient corpus as the year’s pass. This corpus can be used to meet your girl child’s goals such as education, buying a home or even marriage.

How does Sukanya Samriddhi Yojana Account Work?

As parents, you can invest a minimum amount of Rs 1,000 and up to Rs 1.5 lakhs every year into your daughter’s account under this scheme. These deposits can be made only for the first 15 years after opening the account, after which no deposits can be made and the funds in the account would grow from the accumulated compound interest.

Subsequently, the accumulated amount can be withdrawn till the age of 21 years and can help your daughter support her dreams of higher education, starting a business or marriage, once she is no longer a minor.

Eligibility Criteria for Sukanya Samriddhi Yojana

The Government of India has made Sukanya Samriddhi Yojana accessible for the entire population of India, and hence, you can open an account at any post office nearest to you. The directive of the Sukanya Samriddhi Yojana is as follows :

  • Only the parents or legitimate guardians of the girl child can open a Sukanya Samriddhi account.
  • The girl child has to be under 10 years at the time of account opening.
  • The account can be operational only till the girl child is 21 years old.
  • The opening investment can begin from ₹250 with an deposit cap of ₹1,50,000 yearly with ongoing deposits in the products of ₹100.
  • An individual girl child cannot have numerous Sukanya Samridhhi accounts.
  • Only two Sukanya Samriddhi Yojana accounts are permitted per family.

Performance of the Sukanya Samriddhi Yojana

The interest rate on this scheme is fixed by the government and is reviewed by them every quarter. The Sukanya Samriddhi Yojana interest rate over the past few quarters are given below :

Time PeriodSSY Interest Rate (% annually)
Jan to Mar 2023 (Q4 FY 2022-23)7.6
Oct to Dec 2022 (Q3 FY 2022-23)7.6
Jul to Sep 2022 (Q2 FY 2022-23)7.6
Apr to Jun 2022 (Q1 FY 2022-23)7.6
Jan to Mar 2022 (Q4 FY 2021-22)7.6
Oct to Dec 2021 (Q3 FY 2021-22)7.6

Benefits of Sukanya Samriddhi Yojana

  1. High Interest : A Sukanya Samriddhi Account provides a higher rate of interest than most other savings plan that offer financial security solely for the girl child. Each financial year, the government declares the new applicable interest rate for that year, which is compounded on a yearly basis. By maturity, the assets under your Sukanya Samriddhi Yojana account will increase manifold – thanks to the power of compounding. Here we have shown how an approximate corpus can be generated using the Sukanya Samriddhi Yojana calculator :

Sukanya Samriddhi Yojana Growth Pattern

  1. Significant Tax Savings : Your investment/savings towards the Sukanya Samriddhi Yojana and the betterment of your daughter’s future are eligible for tax deductions under Section 80C of the Income Tax Act 1961. Thus, you can claim tax reductions of up to Rs 1.5 lakh invested in the scheme. Moreover, the tax-saving benefits are also available on the interest amount earned and the amount received upon maturity or withdrawals. The Sukanya Samriddhi Yojana scheme is under the authority of the Department of Revenue and is one of the more popular investment schemes that come with the exempt-exempt-exempt status.
  2. Guaranteed Maturity Benefits : Upon maturity, your entire account balance under the Sukanya Samriddhi Yojana, including the accumulated interest, will be paid directly to the policyholder. Thus, the scheme essentially assists your daughter to become financially independent and empowered once she is mature enough to make life decisions all by herself. Another benefit of investing under this scheme is that your accumulated savings continue to accrue compounding interest even after maturity up until it is finally closed by the account holder.

To conclude things

Sukanya Samriddhi Yojana provides one of the best possible investment opportunities for you to build up a sufficient corpus for your daughter when she turns 18 years old and is mature. The Sukanya Samriddhi Yojana comes with a sovereign guarantee, while its EEE status provides several benefits to both the parent and their little girl.

Asset Allocation – diversification of assets for massive gains!

There is a famous saying – “Putting all their eggs in one basket”, in financial terms it often means putting all your assets into one resource or asset class but if the asset class dips, one loses all their money. Although it might be a high risk-high reward proposition, following this method is not ideal if one wants consistent returns. So in-order to diversify your assets into different resources, one uses the concept of asset allocation.

Understanding Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk appetite, and the duration of their investment. The three main asset classes of investments, i.e equities, fixed-income, and cash and its equivalents—have different levels of risk and return, so each will behave differently over time and will suit the expectations of each individual differently.

Historically equities have usually been the major constituent in asset allocation schemes, closely followed by bonds and alternatives. This trend shows that people don’t mind a riskier outlook towards investments, if invested for a substantial period.

The importance of asset allocation

There is no simple formula that can determine the right asset allocation for every individual investor. However, the general consensus among most financial professionals is that asset allocation is one of the most important decisions that investors usually make. In other words, the selection of individual assets (for eg – which stock to buy?) is secondary to the way that assets are allocated in stocks, bonds and cash and equivalents, which will be the principal determinants of your investment results.

Another important factor of asset allocation is that it allows you to tweak your portfolio to exactly match your risk appetite. Doing this, makes the chances of you meeting your financial goals much easier.

Allocating assets also secures you from the emotional turmoil caused by any irregular movements in the market. An asset allocation based approach takes emotions out of the process of investing and keeps you disciplined. You should always invest according to your asset allocation irrespective of any market movements.

Types of asset allocation strategies

  1. Strategic asset allocation : In Strategic Asset Allocation strategy, the fund has static asset allocation mix and does not change no matter the movements in the market. Strategic asset allocation is similar to the buy and hold strategy in stocks and bonds. One of the major advantages of strategic asset allocation with a stable rebalancing strategy is that it enforces discipline in investments.
  2. Dynamic asset allocation : In this asset allocation strategy, one continuously adjusts their asset allocation mix depending on market conditions and trends. The most common dynamic asset allocation strategy used by mutual funds and asset managers is the counter-cyclical strategy. These funds increase their equity allocation (reduce debt allocation) when equity valuations decline (become cheaper) and reduce debt allocations.
  3. Tactical asset allocation : Tactical Asset Allocation is a variant or subset of Strategic Asset Allocation strategy where the investor can occasionally deviate from their long term Strategic Asset Allocation plans to take advantage of market opportunities. Tactical asset allocation calls for understanding market timing and requires considerable investment expertise.

Rebalancing and Asset Allocation

Rebalancing is what investors make use of to bring their portfolio back to its original asset allocation ratio. Rebalancing is needed because over time, some investments might grow faster than others. This may push your holdings out of alignment with your investment goals. By rebalancing, you will ensure that your portfolio does not overweight a particular asset category, and you’ll return your portfolio to a comfortable level of risk, suitable to your needs.

For example, you might start with 50% of your portfolio invested in stocks, but see that rise to 70% due to market gains. To reestablish your original asset allocation mix, you’ll either need to sell some of your stocks or invest in other asset categories by putting in more money. The below image shows how a portfolio comprising of 50% equities and 50% debt will change over a period of 10 years.

How to determine your asset allocation ratio?

Determining your ideal asset allocation ratio is very important in anyone’s financial journey and there are multiple factors at play to determine this ratio :

  • Your different financial goals – short term, medium term and long term
  • Your risk appetite – lower your risk appetite, higher the debt allocation. (Try taking our risk assessment test to determine your risk appetite.)
  • Your age – younger investors may have higher allocation to equities
  • Your assets and liabilities – if you have substantial liabilities, you should not take make exposure to equities
  • Your current investment portfolio and its asset allocation

To sum it all up

Asset allocation or the selection of individual assets is secondary and much less important to the way that assets are allocated in stocks, bonds and cash and equivalents, which will be the principal determinants of your investment results.

NPS – National Pension System

Retirement. A variety of ideas come to mind when you hear this word, including travel, daily expenses, doctor visits, and so forth. It would help if you had a steady investment in some pension scheme like PPF, EPF, or NPS to last until the end because, post-retirement, you are unemployed or without a reliable source of income.

In addition to helping to create a retirement corpus or offering pension services, several schemes provide investment options. In addition to Public Provident Funds (PPF), Employee Provident Funds (EPF), Fixed Deposits (FD), and others, there is one more program focusing on retirement plans called the National Pension System (NPS).

National Pension System (NPS)

The Government of India-backed and PFRDA (Pension Fund Regulatory & Development Authority) controlled NPS is a distinctive pension program that offers both assets and deficit accessing a single investment and ensures a monthly pension after retirement.

NPS Eligibility

  • All Indian citizens, whether they are residents or not, between the ages of 18 and 65, may participate. At 60, one can join the NPS and keep making payments until they are 70.
  • Individuals should have their Aadhar card linked with their PAN number.
  • Individuals should fulfill the KYC requirements as per the Subscriber Registration Form.

How NPS Works?

  • Individuals with NPS accounts can contribute a minimum of Rs. 1000 per annum.
  • PFRDA then pools the investments in a pension fund.
  • PFRDA-approved fund managers then invest the funds in diversified portfolios of government bonds, corporate debts, and shares.
  • The returns or interest rates offered by NPS vary according to market conditions.
  • Upon retirement, the individual can withdraw a tax-free matured amount equal to approximately 60% of the investment.
  • The remaining 40% must be invested in annuities, which generate monthly pensions through generated interest amounts.

Features of NPS

  1. Low-cost scheme, requiring just a Rs. 1000 minimum yearly investment.
  2. Open program for all NRIs and citizens of India, ages 18 to 65, whether employed by any company or self-employed.
  3. Enables the choice of fund managers and investment strategies.
  4. The matured amount can be easily withdrawn after 60 years of age or withdrawn early after three years of investment.
  5. Enables fund diversification through asset classes, which are groups of assets based on the level of risk they involve.
  6. Using the dedicated NPS Portal, people can access their accounts from anywhere using a 12-digit Permanent Retirement Account Number (PRAN) card.
  7. Tax benefits of up to INR 2 lakhs for working individuals and a tax-free maturity amount upon retirement.


Tax Benefits of NPS

Section 80CCD (1)

The contribution made by a Government Sector Contributor (salaried) and a Non-Government Sector Contributor is described in Section 80CCD (1) of Section 80C. These contributions add up to 1.5 lakh INR. Salaried workers may deduct up to 10% of their salaries, while self-employed people may deduct up to 20% of their gross income.

Section 80CCD (1B)

Accompanying deduction of INR 50,000 for any additional self-contributions above Section 80CCD. Both salaried and self-employed individuals are subject to it and can avail of the benefit.

Section 80CCD (2)

Government and non-government employers’ contributions on behalf of their staff. A person may deduct the most is either the employer’s NPS contribution or 10% of their base salary plus Dearness Allowance (DA). Self-employed people are not eligible for this benefit.

Types of NPS account

  1. Tier I
  • Each person must open the fundamental, required account to participate in the NPS scheme.
  • The entire amount cannot be withdrawn before age 60, but under certain circumstances, you may withdraw up to 25% of the invested amount three times in a five-year period.
  • You must open the account with at least INR 500, and there is a fee of INR 1000 per year.
  • It is eligible for tax deductions of up to Rs. 1.5 lakh annually under Section 80C and an additional sum of up to Rs. 50,000 annually under Section 80CCD (1B).
  • Sixty years of age allows for the tax-free withdrawal of 60% of the corpus.
  • Annuities may be purchased with the remaining 40% of the maturity amount. It is possible to use the annuity’s interest as a pension, but it is taxed.
  1. Tier II
  • The account is for retirement savings.
  • Only those with active Tier I accounts are eligible to open it.
  • Anytime is a good time to withdraw the money.
  • After a three-year lock-in period, government workers are eligible to claim tax exemptions, but contributions are not tax deductible for the public.

Tier 2 vs Tier 1 NPS


It can be daunting to guesstimate the precise amount you’ll need to live comfortably during your retirement years. You can create the ideal retirement corpus that satisfies your financial needs by using NPS as a core retirement savings plan with some assets and supplementing it with other low-risk schemes that offer good returns and flexible liquidity.


1. How to open an NPS Account?

To open an NPS Account, you would need to:

  • Complete the NPS registration.
  • Submit the necessary paperwork along with the Verification paperwork.
  • Upon successful completion of your NPS login, the CRA will give you a PRAN (permanent retirement account number)
  • The minimal account opening charge and the fund management fee must also be paid.

What is compounding and how does it work?

Compounding is the process in which an asset’s profits, from either equity gains or interest, are reinvested to generate additional earnings over a given period time. This growth, calculated using an exponential function, occurs because the investment will generate earnings from both its initial amount and the accumulated earnings from preceding periods.

Understanding Compounding

Compounding usually refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest. Compounding is absolutely crucial in the world of finance, and the gains attributable to its effects are the backbone to many investing strategies.

For example, a very common practice is to reinvest cash dividends earned from equity investments to purchase additional shares of the same stock. Reinvesting in dividend paying stocks compounds the return on investment because the increased amount of shares will consistently increase future income from dividend payouts, assuming the stocks pays out steady dividends on a regular basis.

Investing in such dividend growth stocks on top of reinvesting dividends adds another layer of compounding to this strategy that many investors refer to as double compounding. In this case, not only are dividends being reinvested to buy more shares, but these dividend growth stocks are also increasing the per-share payouts.

Compounding and its effects

Power of Compounding

Compound interest includes interest accumulated during previous periods thus the investment grows at an ever increasing rate. Power of compounding enables your earnings to grow while your investments grow. Here’s how you can understand this better :

An interest is added on the initial investment amount, this interest is the compound interest. Since the amount would be added to your initial investment amount and the new interest is calculated on this new amount, the investment will continue to grow as this process would be consistent all throughout the period of investment.

The effects of compounding strengthens as the frequency of compounding increases. Assume a one-year time period. The more compounding takes place throughout this one year, the higher the future value of the investment will be, so naturally, three compounding periods per year are better than two, and four compounding periods per year are better than three. To illustrate this effect, lets take an example and calculate the compound interest for Rs.10,000 and see what happens to it over 10 years with varying compounding frequencies :

Compounding done every yearInvestment AmountCompounded Amount

Compounding – The boons and banes

Compound interest works on both investments and liabilities. While compounding can boost the value of an asset very rapidly, it can also increase the amount of money owed on a debt, as interest accumulates on the unpaid principal amount and previous interest charges. Even if you make loan payments, compounding interest may result in the amount of money you owe being greater in the future.

The concept of compounding is especially problematic for credit card debts. Not only is the interest rate on credit card debts very high, the interest charges may be added to the principal balance and incur an interest assessment on itself in the future. For this reason, the concept of compounding is not necessarily per say “good” or “bad”. The effects of compounding may work in favor of or against an investor depending on their specific financial situation and what they do with their money.

Compound interest and the effect of time

Many young individuals take the combination of time and compounding very lightly. For people in their 20s and 30s the future seems so far ahead, yet these are the years when compound interest can be a game-changer. Investing small amounts from a young age can be much more profitable than investing large amounts later in life.

Allowing your investments to mature while compounding at the same time can create huge profits and increase your money dramatically.

In Conclusion

The long-term effect of compound interest on your savings and investments is indeed miraculous in nature. Because it grows your money much faster than simple interest, it is a very central factor in increasing wealth. It also mitigates a rising cost of living caused by inflation, as it will almost certainly outpace it and grow your money dramatically.

For young people especially, compound interest is a godsend, as they have the most time ahead of them in which to save and invest.

6 fads influencing wealth management in India

The wealth management industry has experienced an exemplary change in the last few years spearheaded by changing demographics with a dramatic increase of millennials joining the investing wagon, and rapid digitalization. The past few years have been nothing less than a Midas Touch for investors. The equity market continued to soar to new highs, drawing a large number of first-time investors. Testimony to this fact is the number of Demat account openings hit a record of 14.2 million in FY 2021. These developments are creating new exciting opportunities and challenges for the wealth management industry

Shift in investor demographic

The younger generation are much more financially educated, have access to expert knowledge and financial tools and are actively investing in a structured manner, with specific goals to achieve. The new generation of millennials and Gen-Z individuals are digital first and always connected. They expect 24/7 access to portfolio data and new investment opportunities with rapid growth potential. Capturing this rather tricky market is vital for the wealth management industry.

Trends to be taken in note by wealth management firms

Digitalization of the wealth management infrastructure

Human connections and personally developed relationships have been the bedrock of the wealth management industry – and will continue to be so. New investors still want someone to guide them through their various financial endeavors. But the need for easy to use digitalized wealth management solutions has never been greater. Digital wealth management is not limited to offering digital channels for managing assets and performing transaction; it extends to using technology to offer a greater value, professional service and improving the customers’ investment experience. Advisors should also embrace these digital tools. Using big data and analytics will be vital for the future of the wealth management industry.

Emergence of new asset classes

More and more retail investors are moving beyond traditional asset classes like fixed deposits and equities because of sub-optimal returns and growth rates, thus urging them to look for alternate opportunities. The emergence of new asset classes such as, Crypto Currencies, NFTs, hedge funds and ESG investments have intrigued the masses. Owing to this, the wealth management offerings are thus going to change dramatically and will definitely move beyond the usual run of the mill sophisticated products.

Need for personalized portfolios

Wealth management solutions will no longer remain a one-product-fits-all strategy and will move towards hyper-customized advisory based on the risk appetite, goals and time horizon of the investors. Investors expect investment opportunities that align with their future goals like building a retirement corpus. The ability to a understand clients’ needs and personalize to those is a key value and differentiator for advisors, putting them leagues ahead of robo-advisors.

Increasing need for guidance

Financial markets have become much more complex due to a wide variety of investments options available in the market today. Investors are often left baffled regarding which products to invest in and how to determine the suitability of these choices based on their own risk taking capacity and the goal they wish to achieve. The need for an unbiased wealth manager, who can handhold and guide the investor through their financial journey, has, therefore, increased manifold. Investors value honest advice on how to achieve multiple yet conflicting goals through a range of investment and funding strategies.

While this means that there will be umpteen new opportunities for the wealth managers, excessive competition has also posed a new challenge to sustain, grow, and strive in this ever growing market. This is a rather challenging environment for investors and their advisors to find the right return-risk combination. Increasing regulatory burdens and the growing costs of risk pose new challenges to wealth management firms and their clients.

Financialization of assets is growing

Historically over 95% of personal wealth of the Indian population was stores in physical assets such as gold and real estate.

Trends to be taken in consideration by wealth management firms

But all that is changing very fast. The Indian population is increasingly preferring financial assets over physical assets, which has led to the ‘financialization’ of savings in our country. The intensity of the growing financialization of assets can be gauged by the fact that the Assets Under Management (AUM) of the Indian mutual fund industry has spiked dramatically, growing over four-fold in the last 10 years. The population now is much more aware that concentration of assets in non-financial assets can cause huge loses in the face of inflation. With a much more diversified portfolio-building approach, they can enjoy better returns, as well as better efficiency from a liquidity and contingency planning point of view

To wrap it up

In a nutshell, the wealth management industry is at the cusp of a major transformation and most of the upcoming trends are related to accessibility, technology, and customer-centricity. However, the time-tested fundamentals of investing still remain the same and should still be the main focus.

6 Financial Mistakes To Avoid – A quick guide to improving your personal finance

People usually start considering about their personal finances in their late 20s and early 30s. This age group is of the people who are fairly settled in their lives and careers. It is a good time to reflect on your personal finances and evaluate the progress made thus far, and also chart out the way forward. In this article we will go over the 6 biggest financial mistakes, one can make to worsen their personal finances.

Not having reserved funds in case of an emergency

The term “Emergency Fund” refers to money kept in reserve, that one can use in time of financial distress or emergency. The purpose of an emergency fund is to improve the sense of financial security by creating a safety net that can be used to meet unanticipated expenses, such as illness or loss of employment during a global financial crisis.

While some call having 1 to 2 months of wages in reserve an ideal amount ideal, most financial experts say that the recommended emergency fund amount should cover 3 to 6 months worth of household expenses. Although if you are self employed or are working in an industry with turbulent workflow, it is best practice to reserve about 6-9 months of wages in advance.

Poor insurance plan

Every individual must have an adequate amount of life insurance and health insurance. A life insurance will help your family handle the expenses incurred if you pass away as well as ensure that they have the resources to get through a difficult transition after you are gone.

Life insurance is often inexpensive for adults who are in good health, and the peace of mind it offers is simply priceless. Knowing that your loved ones have the resources to thrive after you are gone is one of the smartest financial decisions you can take.

You should have an ample amount of health insurance for your entire family. A health insurance is a type of insurance that covers medical expenses that may arise due to an illness or accident. These expenses could be related to the various hospitalization costs, cost of medicines or doctor consultation fees. You may receive a health insurance from your employer as a part of employee benefits, which is good in most cases. But, it is ideal to have your own family floater health insurance for the entire family.

Not investing sooner

Many young individuals feel that their late 20s and early 30s is the time to enjoy life and not bother about retirement planning and their future. But one must realize that it is never too late to start investing and save for the future. By investing earlier in life, you allow the power of compounding to work its magic for an even longer period of time, thus growing your money to huge multiples.

For example, let’s say three individuals aged : 30 years, 40 years and 50 years want to start investing Rs. 1,80,000 annually (Rs. 15,000 every month) in an equity mutual fund scheme. Each individual will invest till their retirement (at age 60 years), and are expecting a return of 12% CAGR. Their retirement fund will look like :

AgeInvestment Time HorizonAnnual InvestmentExpected Rate of ReturnRetirement Corpus
3030 yearsRs. 1,80,00012% CAGRRs. 5,29,48,707
4020 yearsRs. 1,80,00012% CAGRRs. 1,49,87,219
5010 yearsRs. 1,80,00012% CAGRRs. 34,85,086

Avoiding Goal Based Financial Planning

Many individuals lean towards ad-hoc investments in mutual fund schemes. These investments are not mapped towards any specific financial goals. It is not an ideal way of investing. When there is a fixed notion or goal of what one wants to do with the set-aside income in the future (after it has seemingly matured), it is called Goal Based Investing.

Goal based investing involves keeping a specific personal goal in mind while choosing the method to invest. Goals help investors stay on the course and keep investors disciplined as they can monitor and track their progress at regular intervals. A set of clear goals helps strategize and dramatically improve budgeting. As a result, investors deal with poor market movements better. Focusing on long-term goals, allows us to be less distracted by short-term volatility and noise.

If you are in your 30s, map your investments to meet your financial goals. You should ideally follow a comprehensive financial plan that involves a combination of an emergency funds, insurance (health and life), goal planning, tax planning, estate planning, budgeting, etc.

Allowing lifestyle creep to occur

Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities. Lifestyle creep can easily deplete a person’s finances. The best way to combat lifestyle creep is through budgeting and discipline.

A budget is an estimation of incoming and outgoing cash flow over a specified period of time and is usually compiled and evaluated in regular intervals. To track monthly expenses and buy high ticket items without going into debt, budgeting is highly important. Budgeting helps you understand, where your money goes and will help you gain a greater control over your finances.

There are many different budgeting techniques that can be used to prevent lifestyle creep, such as : The 50:30:20 rule, incremental budgeting, activity based budgeting, value proposition budgeting and many more.

Paying off the wrong debt first

If you have outstanding loans and EMIs to pay, it can be hard to know what to tackle first. But financial advisors caution that you should be careful which balance you pay off first.

When working on your debt payoff plan, start by writing down all your balances and their corresponding interest rates. It is usually recommended to tackle your highest interest rate debt first, like credit card bills, then move onto the lower interest rate debts. Paying off your high-interest debt also helps you save in more ways than one.

Often paying off the wrong debt first can cause huge financial losses because of the growing rate of interest on the outstanding debt.

In Conclusion

When you abstain yourself from these financial mistakes and embrace healthy financial habits, the probability of you, achieving your financial goals becomes quite high. Avoiding these mistakes will help you grow financially and help you reach greater heights.

Inflation and How it impacts investments – A detailed explainer

As a customer, you must have definitely experienced an increase in prices of various goods and services over a period of time. For example, petrol used to cost about ₹70-80 a litre, a few years back and today it costs more than ₹100 a litre. Similarly, you must have noticed an increase in the price of various other goods, such as vegetables, fruits, cars, phones and many more. This gradual increase in price is nothing but inflation.

If your investment returns are not able to beat inflation in the long run, it can jeopardize your chances of meeting your financial goals. Let’s take a deeper look into inflation and truly understand how it can affect our investments.

What is Inflation?

Inflation is the general trend of an increase in the price of various goods and services, on a year-on-year basis. A rise in inflation can also be associated with a decline in the purchasing power of the customer, over time. In simple terms, during inflation one will need more money to buy the same amount of goods and services the very next year.

For example, the bread used to cost ₹30 per loaf last year, while it costs ₹33 currently. This means, to buy the same loaf of bread you will have to pay 10% more than last year. It means the bread inflation is 10% on a year-to-year (Y-O-Y) basis.

Take a look at the table above. It is clear that the prices of various food products have increased dramatically over the past year. This means that a person has to shell out more money in order to buy the same food products, the very next year. Hence, one needs to earn more money with every passing year or needs a higher return on their investments than inflation to sustain the same standard of living.

How does inflation affect your ROI?

Return on investments or ROI in short is an approximate measure of an investment’s profitability. As an investor, you must always consider your ROI after considering the effect of inflation. For example, as of today, the ICICI Bank 1-year fixed deposit pays a return of 6.10% per annum. In this case, if you put ₹10,000 in this fixed deposit, then at the end of 1 year the ₹10,000 will become ₹10,610. The September 2022 inflation rate based on Consumer Price Index (CPI) is 7.41%. This means that goods that took ₹10,000 to purchase last year, would now take ₹10,741 to obtain. So one has to put in an additional ₹131 to maintain the same standard of living.

Just like in the above example, when the inflation rates are higher than the current ROI, rather than making money you lose money. This is because you had to pay money from your own pocket to sustain the same standard of living as last year. In conclusion, high inflation can easily erode the purchasing power of your money.

How can inflation affect your financial goals?

One of the most common mistake that investors make when planning their investments is not accounting for inflation. If your ROI is not able to beat inflation in the long run, it can hamper the chances of you meeting your financial goals. Let’s take a look at this, with the help of an example. As explained above, the value of ₹10,000 will change over time with the rate of inflation. Let’s say that the rate of inflation is 6%, then you will need to save an additional 6% to ensure that your savings can be sufficient to help you achieve all your long-term financial goals like your dream house, your child’s education, your retirement and much more.

Hence, you should plan for the effects of inflation and start investing your money in financial instruments that can offer you higher returns to counter the effects of inflation.

Let’s say that the average monthly expense for your family is about ₹1,00,000 as of today. The table below can be used to understand how can inflation affect your monthly expenditure :

YearExpense Amount
Start Year₹1,00,000/-
10th Year₹1,68,948/-
20th Year₹3,02,560/-

Now, let’s see how are your savings affected by the same inflation rate as above :

YearExpense Amount
Start Year₹1,00,000/-
10th Year₹57,299/-
20th Year₹30,862/-

You can see that the number of expenses will continue to increase, while the value of your savings will keep decreasing over time. This makes it all the more important, that you should consider inflation while planning the structure of your portfolio. Thus, you should start investing your money in financial instruments that can offer you higher returns to counter the effects of inflation.

How to counter inflation?

There are various strategies that can be implemented to plan for inflation. Some of these strategies have been listed below:

  • Create a strong investment strategy: A strong investment strategy can be a major building block for your future savings. A sound approach to investing can help you tackle inflation and ensure adequate savings that stand the test of time.
  • Add inflation-proof investments to your portfolio: Investments that offer returns that can counter the ill effects of inflation will certainly help you tackle the rising prices. Hence, you should look for investments that offer you inflation appropriate i.e high returns. A good example of this is equity mutual funds. Equity Mutual Funds park their major investments in equity and equity-related instruments in an attempt to get you higher returns and thus being one of the riskier forms of all the available mutual fund schemes in the market.
  • Diversify your investment pool: While traditional saving instruments might offer you secured returns and ease of accessibility, they may not be sufficient to keep up with the changing times and rising prices. You must diversify your portfolio and ensure that your money is efficiently invested for the long term in market-linked instruments. This will offer you higher returns as well as the ability to combat inflation.
  • Consider the taxation: It is really important to understand the post-tax returns of various instruments to understand the true rate of return. For e.g. Traditional options like bank FDs may look very appealing but their post-tax returns are often lower than the inflation rate. Debt mutual funds on the other hand offer a significantly higher post-tax return for investors.

In conclusion

Inflation can be a hindrance to your savings funds if you do not account for it correctly. Therefore, you can invest in diversified inflation-proof opportunities to get high returns, which will subsequently help you combat the inflated rates. Before you invest or save for your tomorrow, make sure to also calculate how inflation is likely to affect you and your future standard of living.

Goal based investing – Convert your goals into reality!

In simple terms, investing is the process of putting money into different asset classes like real-estate, stocks/mutual funds or a commercial venture with the expectation of the money to grow. When one invests, they sacrifice their spending capabilities of today with the purpose of saving and investing for tomorrow.

When there is a fixed notion or goal of what one wants to do with the set-aside income in the future (after it has seemingly matured), it is called Goal Based Investing.

The income you set aside represents a future goal, whether it is for your child’s education, to buy a home or to get a regular income post-retirement. In order to achieve these goals a well-designed investment strategy needs to be followed, which focuses on how to reach that goal.

How does Goal Based Investing work?

Goal based investing involves keeping a specific personal goal in mind while choosing the method to invest. To simplify the process of goal based investing, one must always keep three questions in mind while planning towards reaching a goal :

  • How much money do I need to achieve my goal?
  • How much time do I have to grow my capital?
  • What is the appropriate amount of risk I am willing to take to reach the required capital amount in the given time?

Think about all these questions and take into account all the factors affecting them. This could involve taking into consideration the economic condition as well as inflation among other factors.

No financial planning is complete without tracking progress. Tracking progress is the best way of assessing performance and making changes that could help ensure that the desired goals are met on time. Another thing to keep in mind is the method to track the progress of growth. It is great if our portfolio is outperforming the market index, but it will be of no use if we do not end up with the original goal we had set out to reach. 

For e.g., If you are saving for your child’s education and would require 2 crores in 10 years now – but if you do not have that money when your child is entering college – then that investment is of no use. Therefore, it is equally important to track your portfolio over its time to make sure you have the money when you need it. 

A good way of structuring that would be to slowly and gradually shift that money from equities to debt as you approach your goal so that your investments are protected. If you need that money in 10 years and the investments are primarily made in equity securities (which tend to be volatile by nature) – then maybe by end of year 7 or 8, you can slowly start moving that money towards safer instruments like debt mutual funds so that your investment is protected and you have the money you require.

Choosing the right strategy

With the target amount of funds in our sight, it is crucial to select the right strategy to meet your goals. Traditional forms of investments involved people investing their income for substantial growth. But, they were not sure about the returns on investment and if they were matching the desired growth rate. This means that while their investments had the potential to outperform the current market trends, they might not be enough to reach their desired goals. Goal-based investing works towards compensating for this. It aims to outperform the market keeping in mind the investor’s threshold for risk. So, choosing the right strategy to grow your capital becomes even more crucial. To choose the right strategy, a proper understanding of how the strategies are formulated is absolutely crucial.

In Goal based investing, all the individual asset pools are stitched together to focus solely on achieving your desired goals in the required amount of time. Let’s see how someone who is currently 30 years old can save towards his/her various life goals. Longer time-horizon goals allow you to invest in higher-return potential-generating assets like equities. 

GoalAsset AllocationTime HorizonDescription
Emergency funds100% Debt (Fixed Deposit, Liquid Funds)3-6 months (accessible immediately)The emergency fund requirement can be calculated using total monthly expenses X 6 months.
Home Investment70-80% in equities, 20-30% in debt10 yearsAim for accumulation of an amount equalling 20-30% of the value of the home.
Child’s College Education80-85% in equities, 15-20% in debt15 yearsIf this is for children’s education needs, ideally savings should be from the time the child is young + investments made in SIPs.
Retirement90% in equities, 10% in debt30 yearsAim for systematic savings while you are employed and generating returns for a secure future.

Periodic rebalancing of investments is also critical for the success of goal-based investing. Rebalancing can help maximize returns and keep the volatility of the portfolio stable in the long run.

Why is Goal Based Investing the best way to invest in your future?

Goals help investors stay on the course and keep investors disciplined as they can monitor and track their progress at regular intervals. A set of clear goals helps strategize and dramatically improve budgeting. As a result, investors deal with poor market movements better. Focusing on long-term goals, allows us to be less distracted by short-term volatility and noise. This is a crucial advantage because not only do investors sometimes lose hope, but emotions can also drive them towards poor decisions. It will help us refrain from selling down our positions or changing our investment strategy to one that reduces our chances of reaching our financial goals, and instead focus on sticking to our designed investment plans and letting compounding do the work. 

To sum it up

Goal based investing is the best way to maintain discipline, keep our emotions in check, and solve the problem of how much and what funds to invest. In today’s day and age, almost every investor does ad hoc investing, but moving to a goal-based framework will be much better in terms of outcomes and lead to less stress during their investing journey. In short, Goal-based investing forces you to focus on what really matters, it is a holistic process to get you to where you want to go, or where you need to go.

Sequence of Returns Risk

Before we explain the concept of Sequence of Returns risk, let’s first quickly take a recap of the two broad categories of investors that exist in the market: a) Buy-and-hold investors: If you invest either a lump sum or make regular contributions through a SIP and do not intend to withdraw any money in the interim – you are a buy-and-hold investor. b) Withdraw investments periodically: If you are in retirement or would like to withdraw a certain portion of your investments regularly. We talked about retirement planning in our earlier post. 

Both of these investors are affected differently by the movements in the markets. While the former is more concerned with the average return generated by the investments over a period of time, the former is bothered about the timing of those returns and the sequence in which they occur.  

The sequence of Returns risk is the risk that the withdrawals from your portfolio will coincide with a ‘sequence’ of negative investment returns in the markets causing permanent damage to your retirement portfolio. This is because, in the absence of regular additions to your portfolio, you are essentially withdrawing from a reducing-balance account that will take a lot longer to recover from the depths. Sounds confusing? The graphs below will make it easy for you to visualise this. 

How it affects your investments? 

Let’s understand that with a graphical illustration: 

Sequence of returns risk

An individual investing INR 10 lakhs as a lumpsum investment when he is 40 years old will see his investment value rise to INR54 lakhs in 25 years assuming an average return of 7%. The ‘sequence’ of the investment returns does not matter as long as the investor continues to hold the investment and has no interim withdrawals. 

When we invest, we often tend to put too much focus on whether we are buying/selling low/high respectively – however, over a period of time, as we can see the outcome is the same. Therefore, if you are in the accumulation phase of your life and are investing towards building a corpus for your retirement – you shouldn’t be too worried about the day-to-day or in fact even year-to-year returns of your investment. What matters is the average compunded returns over the period. 

However, things change significantly during the distribution phase of your investment journey or when you are in retirement and would like to withdraw regularly from your investments. 

Sequence of Returns Risk

Withdrawals from portfolios often compound losses. This occurs because the drop in portfolio happens when the value of your investment is at its highest i.e. during the start of your retirement –  thus it can often take longer for the portfolio to recover. In the above example, we have added annual withdrawals of INR60,000 adjusted annually by 3% for inflation. As we can observe, a person affected by the sequence of returns risk will not have his retirement savings last through the 25-year period until 90. 

How to mitigate the risk?

While it is very difficult to accurately predict how the markets are going to behave, it is best to be a bit defensive and conservative when it comes to withdrawing from your retirement portfolio. Investors these days often do not have an all-equity portfolio coming into retirement – which offers a good starting point for protecting your portfolio during extended periods of downturn. Here are a few techniques to effectively mitigate the sequence of returns risk:

  • Have a cash reserve: History has shown that continual down markets usually do not last beyond 2 years. Hence, to safeguard against a falling market – it is advised to have a year or two’s planned withdrawals set aside as cash. You can set aside this cash in liquid/arbitrage funds which protects your capital while providing some returns. This ensures that you are not being forced to withdraw when it is not the optimal time to do so. 
  • Higher fixed-income allocation during the distribution phase: The asset allocation of your retirement portfolio needs to have a higher fixed-income/debt allocation vis-a-vis equity compared to your portfolio during the accumulation phase. Debt not only provides a hedge during extended periods of the downturn but also ensures that you are not vastly affected by the sequence of returns risk. A balanced portfolio of 60% stocks and 40% bonds (not investment advice) historically has provided higher visibility and safety of return through the debt allocation while allowing adequate opportunity for the growth of assets via its equity allocation. 
  • Scaling down equity exposure 1-2 years before retirement: As you approach closer to your retirement age, it is also a good practice to gradually start scaling down your exposure to equity-related securities like stocks 1-2 years before your retirement. A staggered transfer from equity to debt via a Systematic Transfer Plan (STP) is a good method to do so. This ensures that you end up with the planned retirement amount. 


What is the Sequence of Returns risk?

  • The sequence of Returns risk is the risk of receiving of overall lower or negative returns in your investment portfolio when constant withdrawals are made in a down-market. 

Who does it primarily affect?

  • It primarily affects investors like retirees or anyone who seek constant withdrawals from their investment portfolios.