We all know about physical fitness and, hopefully, we are also conscious about the same. The Body Mass Index (BMI) is a good barometer of our physical fitness and that shows whether our body is in good working conditions or not. What about your financial fitness? How to improve investment portfolio and what are the ways to improve return on investment? Your return on investment is not only dependent on the quality of your investments but also on a variety of other factors. Here are 7 investment tips to improve your returns and improve your financial fitness overall..
Keep a regular tab on your credit report
For the financial sector consisting of banks and other financial lenders, this is the best test of your financial fitness. Whenever you approach a financier for a loan or for a credit card, the first thing they will check is your credit report. Typically, a CIBIL score of above 750 is considered to be a healthy credit score and entitles you to credit from institutions. Your credit report is impacted by too much debt and irregular servicing of debt. If you skip EMIs or if your cheques bounce then these entail negative points in the CIBIL score. Maintaining a good CIBIL score not only ensures financial discipline but also gives a good image of your financial fitness to the outside world.
Reduce your debt to the extent possible
This follows as a logical corollary to the previous point. There is something ironic here. If you have zero debt you do not have a credit history at all and hence that may work against you when it comes to banks. Ensure that your debt is within control and your monthly EMIs are less than 40
% of your monthly income. Additionally, whenever you get bonuses or lump-sum payments make it a point to close out your high cost debt like credit card and personal loans. This will not only be credit positive for you but will also leave you with more surpluses for investments and wealth creation.
Evaluate your equity portfolio consistently against benchmarks
You may have invested in equities and equity funds but the key lies in monitoring. Is your equity portfolio beating the benchmark Nifty and Sensex over the longer term? If not, then you are better off being invested in an index fund. Also compare the performance of your fund with peers in the same group and with the industry benchmark. If your fund is consistently underperforming then it is a source of worry and you need to corrective action.
Evaluate your debt portfolio for stability and liquidity
Just like you evaluate your equity portfolio, you also need to consistently evaluate the debt mutual funds that you are holding. What do the fact sheets tell you? Are you overly exposed to mid-cap or low quality companies? Is your fund portfolio having an average term to maturity that is too long? This can be negative in a rising interest rate scenario. Is your debt fund able to generate safety and stability for you? This is an important measure of your financial fitness.
Create a budget and keep a tab on your spending
This is a very important part of your financial planning process. Typically, most individual budgets have leakages. If you write them down and document them you will realize the gaps and you can plug them. A better way is to treat savings and investments as a target and build your household budget around that. You can treat spending as a residual item rather than the other way around. This will improve your investable surplus to an extent that you cannot even imagine at this juncture. Keep targets for increase in your budget. Some allowance for leisure and inflation is understandable. But just overshooting your budget month-after-month is not acceptable and is not a sign of financial fitness.
Is your investment portfolio tuned to your risk-return matrix?
The risk-return trade-off works both ways. If you take too little risk then you are unlikely to create wealth in the long run. For example, if you are invested up to 80
% in debt when you are 30 years old then this is an absolute waste of your risk taking capacity. The result will be that you will not be able to generate wealth over your life time. In this case, the risk of not taking risk is much higher. Similarly, no point in staying in equities at a time when you retirement or critical goalposts are approaching. At this point of time you need to be more into debt and liquid assets. This trade-off lies at the core of your financial fitness.
Keep a tab on your financial goals
Finally, keep a constant on your financial goals. There are a variety of factors that come into play. For example, if you are saving with the assumption of 4
% inflation and if inflation moves up to 6
%, then your entire calculation changes. Similarly, if you assume average returns of 16
% on equity annualized and if equity is unlikely to give more than 13
%, then you have a huge shortfall to cover in the end. That is why it necessary to keep a constant tab on your financial goals and keep checking if your current investment risk-return trade-off actually represents and is in sync with you goals.
As we go to gyms and Yoga centres to maintain our physical and mental fitness, let us also spare a thought for our financial fitness. What is the use of a healthy body and a healthy mind if your financial security and wealth creation has been compromised?