The stock market is very volatile, and if you’re an equity investor you know that you’ve plenty to worry about. Even those who have invested in the safe Systematic Investment Plans (SIPs) have struggled. This is because, in the last ten years, SIP has earned only 6.13% from Sensex, thereby generating very little incomes for those who’ve invested in it.
As a result, SIP investors have been sorely disappointed and it has become an important concern for investors who expected greater returns from their SIPs and equity investments. The value of these investments has also been greatly affected by the regular fluctuations in the market.
If you want to invest in mutual funds and other equity investments, it’s important that you protect your financial goals from the shifting scales of the stock market. You can protect your goals by keeping these important factors in mind.
What to expect from moderate returns
Since its initiation, the stock market has given an average of 16.82% returns on 10-year SIPs. But when entering this market, investors must not assume that the stock market will perform similarly all the time. An investor must understand that with gradual ups and downs in the economy, the average returns from the stocks might decrease and there is enough historical data to prove that.
In the near future, with the ever-changing and challenging market situation, the average returns to investors are likely to decrease further. This assumption can be the base for expecting lower returns. When lower returns are expected, investors will have to increase the amount of money they save to feed their financial goals.
Prioritise your goals
When the stock markets dip, the investors will take whatever comes to them and wait for the market to recover. But sometimes, not all financial goals can wait for the market to improve. Instead, you, as an investor, must prioritise your goals and focus more energy and time on critical investments. For example, if you’re planning to buy a house, you can think about that and put in your Home Loan application to purchase the property you want.
When goals are prioritised, then financial planning for the future becomes much easier. After that, you can start reviewing your investments according to their importance and the time available to you.
Reduce the risk for your critical goals
Once you’ve set down and allocated your financial goals, a proper investment product must be chosen. You must also plan out the division of investments carefully. It’s important that you don’t invest too much of a critical goal in equity, even if you do have a long-term one. These small steps will help reduce the risks related to investments and will also ensure you get adequate returns to meet your financial goals.
Have a backup plan
It can be very difficult for one to set accurate values to goals. There’s a good chance that these goals can significantly alter over time. Also, if there is a sudden change in your environment, there’s a possibility of your goals being endangered completely. An example of this could be when the price of properties suddenly shoots up. You might have already gotten a Home Loan, but if you have a floating rate of interest and the market has experienced a downfall, your EMIs for Home Loan will increase.
The best back-up plan in these situations for critical goals is a ‘wealth accumulation’ goal. In most cases, you can use the money saved for other non-critical goals as a backup. The number of non-critical goals defines the risk allocated to your critical goals. If the number isn’t very large, then you must be sure of where you decide to allocate the investments of your critical goals.
Rebalance your critical goals
Setting your goals and investing to achieve them is one of the first steps. You have to keep monitoring their progress from time to time and also evaluate the portfolio. You need to do this only once every six months to understand the status of your investments.
These reviews will also tell you whether you need to alter your asset allocation, in the case your equity or debt portion has either risen or fallen beyond the predetermined levels. Here too, you must make your decisions based on the importance of your goals. For a non-critical goal, such as an additional car, let the corpus grow even if the equity portion has increased. However, for your critical goals, you must ensure that the portions stay between the predetermined levels, to lower risk.
Reduce risk as new goals appear
Equity investments are risky and to manage that risk, you should keep an eye on your goals and investments. You should start reducing the proportions of equity within your portfolio before reaching your goal’s end date. Remember to begin this process at least three years prior to the goal date. Here again, your critical goals must be given more attention. You should start reducing the equity component for these investments right after the fifth year.
Remember when you’re trying to safeguard your investment goals, prioritising them is key. If you tread warily through the stock market there’s a better chance of survival and success.