Personal finance Guide to Optimizing Your Investments and Achieving Your Financial Goals

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    49. Personal finance Guide to Optimizing Your Investments and Achieving Your Financial Goals
Marketopedia / Importance of Personal Finance / Personal finance Guide to Optimizing Your Investments and Achieving Your Financial Goals

Prior to reviewing your investments, it is essential to remember a few considerations.

o   Your portfolio should be designed to meet your objectives, not necessarily to maximise returns. Your investments should serve your goals.

o   Your yardstick for success should not be based on surpassing the Nifty 50, but rather, achieving your objectives. Set a realistic yet challenging goal for yourself.

o   The importance of savings outweighs the return you get on your investments.

o   The outcome of your investment journey depends on the proper allocation of assets, prudent risk management, and sound financial behaviour—not on selecting the optimal fund or approach.

o   A mediocre portfolio that is realistic to maintain is preferable to the flawless one you are unlikely to keep up with.

o   The portfolio you need may not be the same as what you desire.

o   Risk management is key to the success of your portfolio. As you progress in years, it becomes increasingly important to minimise risk levels.

o   When planning for retirement, it is wise to bear in mind that the average life expectancy can be deceiving. It is always preferable to save more than necessary, rather than taking a chance and saving too little.


 – Diversification and asset allocation


One of the most well-known sayings in the markets is that diversification provides a free meal. But just because it has been said for years, does not mean its value should be overlooked. Diversifying your investments across different asset classes is the process of diversification. A successful portfolio is always well diversified.


Humans have yet to master the ability to forecast which investments will be profitable. Consequently, the best approach to accumulating wealth safely is to diversify among a variety of assets.


Action item 

Make sure your portfolio is diversified across the following asset classes.  

Equity: Domestic equities, and international equities.  

Debt: Between various durations and risk levels.

o   Risking too much in your debt portfolio isn’t wise. Keeping exposure to AAA-rated bonds and government bonds is the safest bet.

o   I’m not an advocate of long-term risks either. Generally, investors are better served by funds with a shorter to medium duration.

o   Unless you are well-versed on debt, it’s probably best to steer clear of long-term funds, dynamic asset allocation funds, and credit risk funds.

Precious metals, such as gold, offer diversification benefits, although it is crucial to understand the risks involved. There may be long phases where gold does not yield any return and even declines in value in the same way that equities do. It is also important to note that there is not always a negative correlation between gold and equities.

Recently, a multitude of silver ETFs and funds have come onto the market, however I don’t understand the point. Silver carries with it a lot of risk, but no reward.


I recall stumbling upon an article that mentioned the typical retail investor tending to hold between 20-30 mutual funds in their portfolio. That, however, does not translate to diversification; instead it results in a phenomenon known as diversification.

Let me explain. 

SEBI guidelines specify that large-cap mutual funds can invest in the top 100 largest companies by market capitalization. Holding three of these funds would be both redundant and expensive; a direct plan index fund’s expense ratio is approximately 0.25%, while a direct plan of large-cap funds generally runs around 1.3%.

If you have more than one fund in a similar category, that is a sign that you need to review and streamline your portfolio.

Review your portfolio 

Ensure you have a diversified portfolio across different asset types and sub-categories. As mentioned earlier, this is important in order to achieve optimal financial success.

Is your asset allocation in line with your goals and risk capacity?  

Your portfolio’s breakdown depends on asset allocation. The younger you are, the more risk you can handle with a higher proportion of equity. As you get near retirement, it is advantageous to decrease your equity exposure and bolster your debt share.

How are your funds performing?  

To accurately gauge your active funds, look at their performance relative to their specified benchmarks and don’t just assess them based on brief stints. It’s impossible for any fund to remain consistently ahead of the pack.


A million-dollar query then: when selecting an active fund, you’re relying on the judgement of the fund manager. Several people decide on funds and managers by evaluating quantitative indices such as;

o   Regular returns, measured by rolling returns, across different market conditions.

o   It is worthwhile to examine different metrics such as Sharpe ratio, Sortino ratio, information ratio, and capture ratio.

o   Analysing fund returns through factor models to gauge exposures to factors like value, quality, momentum and volatility. In addition, holdings-based analysis is utilised to break down returns into styles, asset classes and other exposures.

o   Does the manager offer a track record of superior risk-adjusted returns after charges?

Qualitative factors such as the personality and temperament of the manager, processes, risk management, alignment of interests, reputation and track record should be carefully considered when selecting an AMC. The Chartered Financial Analyst (CFA) institute has published an informative book on this topic if you wish to explore it further.

No matter how sophisticated the tools, techniques, or the use of AI and machine learning, the majority of active fund managers fail to outperform their benchmarks. Particularly in the large-cap sector, 70-80% of all funds don’t beat S&P BSE 100.

The argument regarding mid-capitalisation and small-capitalisation funds is that they are inefficient and active fund managers can theoretically add value. Nevertheless, the data do not support this statement; the number of underperforming active mid-cap funds is growing when compared to the S&P BSE Midcap 150 or Nifty Midcap 150 indices. Picking an outperforming active fund is a gamble at best.


Based on the evidence, these are the building blocks of your core portfolio: 

Large-cap: Nifty 50   

This index is made up of the 50 biggest businesses in India, and it represents 62% of the free float market capitalization. A Nifty 50 index fund gives you exposure to approximately two-thirds of the publicly-listed companies.

Large-cap: Nifty Next 50 

NSE classifies this index as large-cap, though it acts as a mid-cap index. It contains the 50 largest companies after the Nifty 50 firms, accounting for 10% of the free float market capitalization of listed stocks at the exchange.

Mid-cap: Nifty Midcap 150

This index comprises the 150 largest companies after Nifty 100, accounting for 12.9% of the free float market capitalization of stocks listed on NSE.

Small-cap funds can be a risky investment, and thus are not suitable for the average investor.


Besides target maturity and G-Sec ETFs, we don’t provide passive debt funds. Nevertheless, if these target maturity funds work for you, feel free to explore them.

Point to consider   

Though categorised as a large-cap index, Nifty Next 50 tends to behave like a mid-cap index. Analysing its performance in comparison to the Nifty Midcap 150, there is little difference over the majority of its history, with the exception of the last 5 years. This raises questions as to whether introducing a mid-cap 150 fund would offer more diversification when included in a portfolio.

But if you still believe in your active fund manager:  

o   It’s best to give the fund at least 5 years before making your assessment. While some may prefer shorter time periods, this can be disregarded; it’s simply background noise.

o   In the short term, if an investment fund fails to reach a return of 5-10% or more when compared to its benchmark, that’s a cause for concern.

o   If there is an issue with corporate governance, a shift in the fund’s strategy, or the acquisition of an AMC, it is your choice whether to remain in the fund or not.

 Reviewing stocks 

You should review your portfolio if you are investing in direct equities.  

o   Check if the thesis behind your stocks still holds.   

o   If there are any financial or corporate governance issues. 

o   Ensure your portfolio is well diversified. A lot of retail investors tend to hold 50+ stocks in their portfolio. It’s not just hard to monitor it, but hard to maintain it. There’s no right number of stocks, but beyond a point, there are no diversification benefits, and the portfolio becomes hard to monitor

 – Rebalancing

The process of asset allocation involves deciding the percentage of your portfolio to assign to each asset class, such as equities, debt, and gold. For instance, you might select a split of 60-30-10. After one year, if equities increase significantly then the equity allocation could reach 70%, while debt and gold would decrease to 25% and 5%, respectively. If these percentages are kept without readjustment, the risk in your portfolio is liable to soar, which may also cause heightened volatility.

Your portfolio’s volatility can significantly influence the likelihood of achieving your goals, particularly if you are nearing them. Rebalancing your portfolio at regular intervals is a proven method for lowering its risk.

How do you do that? 

To keep your desired portfolio allocation, you can rebalance: sell assets that have grown above the target and buy those that have fallen below. An example would be selling 10% of your equity and 5% of your debt shares, which will bring their total to 70%, while increasing your gold share to 10%.

I know what you’re thinking—the dreaded T word. Yes, by rebalancing, you will incur taxes, but saving taxes is not the objective of investing, reaching your goals is.  

A few things to remember: 

o   When you look at the tax implications of rebalancing, they may not be very significant. Remind yourself that capital gains on equity investments is only taxable above Rs 1 lakh and indexation is available for debt fund investments. All of these factors should be taken into consideration when considering the entire composition of your portfolio.

o   Rebalancing is as much about reducing risk as it is about returns. The image above provides insight into how much portfolios would’ve dwindled during the 2020 COVID-19 crisis – but taxes are a small price to pay for that security.

o   Rather than readjusting every time your proportions shift, you may choose to rebalance only once a year. Additionally, setting a 5% allowable variation within each asset class will help determine when an adjustment needs to occur. For example, when your equity weight rises from 60% to 63%, no action is necessary; but if it climbs to 65%, it’s time for a rebalancing.

o   Rather than selling a portion of your portfolio, you can employ new investments to rebalance the weights by investing in an asset class that has gone below your desired ratio.

o   Rebalancing will certainly reduce the risk of your portfolio—that’s a definite. Whether it improves returns or not is subject to luck, rebalancing amounts and timing.

o   Rebalancing opportunities with sub-classes of assets may lead to higher expected returns. Consider, for instance, when the value of equities has dropped but mid and small-caps have taken an even steeper dive, leading to low valuations – this could be the ideal time to increase your allocation in those areas, while rebalancing your total equity holdings.

Here’s a handy guide to the taxation on equities and debt.

– Savings rate matters more than the return on investments 

The Maruti Suzuki ad famously asked “Kitna Deti Hai?” – and that’s indicative of many investors’ attitude. Instead of focusing on how much return they’re getting, it would be better to concentrate on improving their savings rate. The former is out of their hands, the latter isn’t; so why not focus on what you can control?

A simple example.

In the long run, your rate of savings will matter more than the rate of return on your investments.   

What’s a good savings rate?  

The simplest response is to save whatever you can without sacrificing the basics. If it’s your first time budgeting, try to set aside 15-20%, and make sure you continually increase this amount annually – this is the most integral detail.

What if I can’t save much? 

This is where the next point comes into the picture.  

Your biggest asset 

If you were to build your personal balance sheet, it would look like this.  


But let me ask you this, what’s your biggest asset?  

It’s not your real estate, money invested or anything else tangible; it’s your human capital. That is, the estimated value of your future earnings capability. We tend to think we are accumulating wealth to retire comfortably and yet really we’re transforming our human capital into financial assets.

Most people lack an understanding of this idea while financial planners tend to leave it out of their plans. Generally the discussion is limited to stocks, fund selection, and asset distribution. It should be kept in mind that the foundation of any successful financial strategy lies in human capital, not the other way around.

In conclusion, your human capital deserves the greatest amount of attention and consideration; it is by far the most valuable asset.

If you’re reading this, you likely understand the significance of compound interest on investments. But what if you consider the impact of compounding your skills? You’d receive a greater rate of return than you would from investing your money. As you get younger, the power of human capital only increases.

Your human capital’s rate of return has a greater impact than your investments’ rate of return on your savings rate.

So, what does that mean? 

o   When you are young, your human capital has the most value. As time passes, its worth decreases.

o   Any expenditure towards furthering your education, honing existing skills and enhancing your knowledge while young will yield valuable returns in terms of more desirable prospects.

o   Human capital can be thought of as a financial asset too. If your work is secure and foreseeable, it is comparable to a bond but if it is fluctuating and unpredictable, it resembles equity.

In terms of asset allocation, human capital should be taken into account. Your occupation and abilities can have an impact on your risk tolerance.

 – Behave!  

The emergence of behavioural finance in the last few decades has been one of the most beneficial occurrences in finance. It’s probably my favourite notion, not because I’m an expert on all the cognitive errors but because it attests that humans aren’t as sensible or faultless as we may think. Of course, we still make preposterous choices!


Somewhere down the line, behavioural science shifted its focus from finding solutions to assist individuals to simply delivering a long list of biases, labels and experiments. Unfortunately, the term bias somehow became an insult, and was used to suggest that people were unintelligent. This is certainly not an accurate representation of what behavioural science stands for.

Our biases may be seen as a feature rather than a bug. Research has shown they have an evolutionary purpose – they aided our ancestors’ survival. When these “quirks” were effective in the past, however, they can prove to be inadequate when it comes to investing. Our progenitors lived in a much harsher environment with uncertainty regarding the future, so there was no incentive to save for it. The world today is far different.

Returning to the matter at hand, we can see that the basic principle of behavioural science remains valid—we don’t consistently make decisions that are most beneficial for us or intended to maximise our utility.

We make mistakes like: 

o   Not saving enough even though we can.  

o   Inability to balance enjoying today vs. saving for tomorrow.  

o   By keeping money in bank accounts, remaining invested in expensive funds, having a below-average asset allocation, and taking an overly conservative approach, you could be missing out on the potential returns available.

o   Sticking to default options even if they are terrible.  

o   Being driven by greed and chasing quick money and other investment fads.  

It’s clear that, beyond the basics of investing, your portfolio’s fortunes don’t hinge on stock or fund selection. The success you can expect is much more about how well you manage your behaviour. With an ideal portfolio in hand, it won’t do you any good if you can’t stay strong when markets fluctuate. Disciplined investment plays a role, but behaviours are paramount.

How do you behave?  

The best way to behave is to get out of your way, so automate your finances. 

o   Invest regularly through SIPs by setting up a standing order to deduct funds from your bank account.

o   Create a SIP to build up your emergency fund.  

o   Automate the payments for your health and life insurance policies.  

o   Set up automatic repayments for your credit cards and other loans.   

o   Automate your rent and bill payments.  

The other aspect is to minimise the odds of you doing silly things. 

o   Having knowledge of the fundamentals of finance can be a great way to ward off foolishness. Gaining an understanding of this area is essential in comprehending that getting rich isn’t fast, and you won’t get there through any type of rapid scheme.

o   It’s best to not observe your portfolio too regularly. Constantly monitoring your investments increases the risk of taking an action you’ll later regret. As an alternative, consider uninstalling your financial applications now and reinstalling them at year-end to evaluate your investments.

o   It’s highly improbable that you can pick the most successful stock or fund. Just research the proof, and then put your money into low-cost, extensive market index funds. After that, get on with living your life.

o   Be aware of any external influences that could affect your financial decisions, as such occurrences can happen without you even realising it. Refrain from comparing yourself to strangers online or within your social group and accept being less well-off. Don’t feel pressured to become wealthy fast; take your time and build at your own pace.

– Money and mental health

I am passionate about this and I really want to emphasise it: if there is anything to remember from this post, it would be what I will mention now.

No matter our financial situation, money invariably has a large role to play in our lives. It can be tempting to assert that money isn’t everything when we have plenty of it. However, for those struggling to make ends meet and faced with bills, such a sentiment is not an option. To this end, it’s easy to see how money can be the source of considerable stress and worry.

The American Psychological Association has administered a survey to assess people’s attitudes towards stress and determine its sources. Money has continually proved to be one of the foremost causes of tension since the survey began, and I strongly think India will have similar results, although we lack comprehensive data.

Financial distress can arise from a multitude of causes, both internal and external. Over the past three years, an unprecedented pandemic, armed conflict and considerable economic uncertainty have all caused tremendous financial disruption. Though these occurrences may induce immense stress and anxiety, ultimately they are out of our hands.

Financial stress is often linked to how we manage money, and the sentiment is usually rooted in our upbringing. Our earliest experiences with money, as well as the beliefs of our parents, can shape our own money values. This can lead to various behaviours, such as being more conservative with money due to hardship or economic instability. These perceptions may even influence how we eat, save and spend, not to mention what kinds of jobs we pursue.

It is vital that you understand the power money has in influencing your life. Experiencing financial tension and uneasiness can take a toll on your mental well-being, with repercussions for your physical health too. To combat this, becoming aware of the correlation between the two is essential.


Financial stress and anxiety are complicated matters with no simple fix. This year in particular, with the onset of a recession, followed by a brief recovery only to move into another economic downturn – resulting in job losses plus business closures – has put us in a vulnerable place. The only thing we can do is accept the situation and modify our habits accordingly.

But there are things in your control that can cause significant financial stress: 

o   Spending too much on unnecessary things. 

o   Not saving enough, even if you can. 

o   Not having adequate emergency savings and insurance. 

o   Not upskilling yourself to deal with an ever-changing workplace. 

o   Being secretive about money with your partners and family.  

o   Benchmarking your net worth to others.  

o   Defining your success and failures with money.   

You have the power to shape your life. Make the most of it by controlling the things you can and accepting the things you can’t. Have you heard of the serenity prayer?

God, bestow upon me the calm to accept what I cannot alter, the bravery to modify those things I can, and the insight to differentiate one from another.

 – Create a what if? folder 

It’s estimated that there is an amount of Rs 80,000 crores which has been left unclaimed in investments, banks and insurance policies, according to Economic Times.

This is because of two reasons: 

o   No nomination 

o   Not telling the nominees even if there’s a nomination 

A friend of a colleague in financial services recently lost their life to COVID-19. Unknown to his parents, he had investments worth over a crore. However, since the colleague was aware of it, he assisted them in getting the money. Without his intervention, his grieving parents would never have known about the funds.

When we put in the effort to make sure our beloved ones are happy and secure, failing to ensure that they’re taken care of if something happens to us is foolish.

Things to keep in mind:  

o   Be sure to appoint a nominee for your investments and insurance policies. You can easily complete the form over the internet or send it via courier.

o   Let your nominees know that you have put them forward. Not doing so would make the nomination moot.

Now, this is the most important thing, create a physical or digital folder with the following details:  

o   Details and documents related to all your investments. What, where etc.  

o   Details of all your bank accounts.  

o   Details about all your insurance policies.  

o   Details of all the liabilities like home loans, loan against investments, etc.  

o   Documents of your properties and other assets.  

o   Copies of your identity proofs, educational documents, etc., used to open accounts and purchase products.  

o   A document detailing the claims process for all the assets and investments.  

Before sending a folder to your nominees, ensure that their emails are secure with a strong password and two-factor authentication. To do so, create the folder on a platform like Google, and share it.

– Beware of financial fraud 

Financial fraud is a pervasive problem, ranging from hacking to identity theft.

o   Ensure you choose powerful passwords for each of your investment and banking accounts, and don’t forget to activate two-factor authentication.

o   Make sure to utilize two-factor authentication when it comes to your emails. This approach will give you an extra layer of security.

o   It is advised that biometric and two-factor authentication be enabled on mobile devices, as a precaution if they are somehow misplaced or taken.

o   You should not divulge account-specific data, records, or personal details on telephone conversations and WhatsApp messages.

o   It is essential to check the legitimacy of websites, as phishing frauds where false sites are set up to steal passwords are widespread.

o   Don’t give out your private information or passwords to anybody.

o   Don’t risk your reputation by using platforms or services with an unfavorable image. It may be difficult to determine, but the most egregious cases are usually easily identifiable.

– Your information diet 

In this era of abundance, it is easy to be overwhelmed with the abundance of financial information available. We have seen how disastrous things may turn out when influencers on social media promote a product they have no clue about: one example being the crypto platform that went bust. Therefore, look before you leap and always take sensible advice over snappy videos with influencers making goofy expressions!

o   99% of day-to-day financial news is garbage.  

o   Investing based on the news or hearsay is definitely not a good idea, and almost certainly will lead to financial losses.

o   The key principles of personal finance remain unchanged. For instance, the Talmud states, “Divide one’s money into three: one-third in land, one-third in commerce, and one-third at hand” as a means of diversification. There is no hidden formula for wealth you can find on YouTube which can replace this timeless principle.


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