FINANCE SPECIAL...... 5 steps to inculcate investing discipline

5 steps to inculcate investing discipline  From the initial stage of goal setting to asset allocation, here is how you can induce discipline to make the investing process more efficient 1 Goal setting Start at the beginning—inculcate discipline while setting goals. You can do so by employing a scientific approach. The first step is to write down the goals and the expected time frame for each. Though financial planning starts with dreams, investors need to make sure that the goals are realistic. The next step is to calculate the money required for each in terms of today’s cost, and then computing the future cost by factoring in inflation.  2 Creating surplus The next step involves identifying the investible surplus to achieve goals; the discipline required is in creating the requisite amount. To do so, investors need to go beyond the money left after accounting for all their expenses. They need to make a deliberate attempt to increase the savings by reducing the spending. The best way to achieve this is to find out how much you need to invest to achieve the goals with reasonable return expectations. Once you know the total amount you need to invest per month, you can arrive at the surplus required. In other words, you need to change the investment habit from the normal ‘earning – spending = investment’ to the more scientific ‘earning – investment = spending’.  3 Regular investments The next step is to invest regularly through compulsory savings or active investment plans. The former is the best option for those who can’t control their spending. The best examples of this are the Provident Fund, tax-saving products, or the repayment of housing loans since you are building an asset. One way to increase the savings is to make investments before the money reaches you. The best way is to save more money in your PF account over and above the compulsory 12% contribution. Though you get the same interest and tax treatment for the additional contribution, don’t expect an equal contribution by the employer. You can also run an active investment plan at the start of the month so that the money is invested before being spent. This can be done in the form of recurring deposits (RDs), systematic investment plans (SIPs) with mutual funds, monthly premiums for ulips, etc, but remember not to get into sub-optimal investment options like ulips.  4 Investment account The best way to ensure that you don’t invest in sub-optimal options is to start a separate investment account. Is the benefit worth the effort of opening and maintaining another account? Yes, says Vikram Dalal, managing director, Synergee Capital Services. “Two accounts—one for investments and the other for regular income like salary—help get a clear idea about your passive and active income streams,” he says. How does one operate these accounts? Start by shifting a fixed amount every month to the investment account from the regular one, and let all your investments flow from the latter. Similarly, let all the redemptions, interests and dividends flow back to the investment account. Since the money in it is not used for consumption, it can be reinvested immediately. It will also help monitor your investments and compute tax efficiently. 5 Asset allocation Ideally, asset allocation should be based on an informed view about the prospects of asset classes. For instance, you should increase the equity allocation when the stock market valuations are cheap and reduce when these are higher. The problem is that most retail investors are unable to maintain the balance and, hence, the best strategy should be to stick to the standard asset allocation based on age or the time period for goals. This means the equity percentage can be based on the formula 100 – age, and one can park in equity for long-term goals, in debt for medium-term ones. Those who follow this mechanical asset allocation need to stick to the financial plan regardless of the market conditions. This is because some rebalancing will take place automatically. So, the equity component will go up in a bull market and this should result in moving a part of equity assets to debt, and vice versa during the bear market. This also stops one from being swayed by the crowd psychology. ,Narendra Nathan. ETW131118