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India is entering the 75th year of its Independence. On this momentous occasion, it is important to reflect on the fact that freedom was the culmination of a supreme patriotic struggle over several decades. Today, India is regarded a global powerhouse in terms of military capabilities, demographic strength, rapidly evolving financial market and a vibrant economy that can potentially grow to $5 trillion over the next few years. Economic growth brings with it a massive wealth creation opportunity and it is essential that we recognize and aim to participate in the same.

All of us have financial goals. The paths we choose to attain these differ for each individual and can lead to either a rewarding, satisfactory or extensive working life. Acclaimed author and philanthropist Tony Robbins has said: “Working because you want to, not because you have to, is financial freedom."

Most of us tend to believe savings is the best option to achieve our goals. However, savings alone is unlikely to keep up with inflation and taxes and will mean a much longer working life to achieve any goal. Hence, savings may not lead to financial freedom.

Investing is the only way to achieve financial freedom. It is a process of taking a measured risk with the potential to grow wealth at a higher rate for the longer term by investing in stocks, mutual funds, etc.

The tenets of investing are based on time horizon, asset allocation and financial goal orientation, which should not change irrespective of market cycles. It takes multiple years for significant wealth creation. The greatest investor of our times, Warren Buffett, puts it aptly, “The most important quality for an investor is temperament, not intellect." The following points can be used as a check-list towards achieving financial freedom:

Start investing now: It would be prudent to draw up your own investment charter, which lays down the philosophy, framework and process of managing your portfolio, while also aiming to understand broadly the asset allocation, purpose of investment, horizon, liquidity and risk appetite. Also, create your own budget to assess monthly savings and expenditure patterns.

Financial investments: Choose your investments wisely, in line with your risk appetite; and if possible, build your portfolio with guidance from a seasoned financial adviser. Maintain the discipline to stick to the portfolio allocation for the long term (at least five years) with periodic review. Investors have often shown tendencies of pulling money out from risk-oriented asset classes (viz. equity) and shifting the same to safe asset classes during a downturn. Such behaviour leads to investors not participating in any upside once the dust settles. After witnessing a bear market in equities, investors usually get cold feet in deploying new money. Instead of timing the markets, one should continue their investments based on the existing financial plan.

Emergency fund: It is advisable to keep at least six months of your expenses as an emergency fund, and putting those funds in highly liquid instruments such as liquid funds or fixed deposits. Having a major portion of your investments into close-ended instruments would be unwise.

Loan management/financial leverage: It is advisable not to take excessive new loans, unless extremely necessary. Any default in repayment of loans could negatively impact your credit score and future borrowing ability. On the contrary, you should try to repay your liabilities starting with higher interest loans such as credit card debts to reduce your financial burden.

Insurance: Both life and health insurance are a must-have for the bread-earners within a family. Simple term plans would suffice for life insurance, while unit-linked insurance policies should be chosen only if you require some return over and above the insurance.

I conclude with some guidance for existing investors across asset classes. Corporate earnings growth is expected to remain strong and will drive equity market performance going forward. For incremental allocation to equities, we suggest 50% deployment immediately and 50% to be staggered over a period of three-six months. We continue to maintain a bias towards multi-cap and select mid- and small-cap strategies. In the current fixed income scenario, we suggest following a barbell portfolio approach, i.e. having core allocation to high-quality short maturity strategies complemented by some allocation towards long maturity roll down strategies. Gold should be treated predominantly as a hedge against heightened volatility.

Motilal Oswal is managing director and chief executive officer of Motilal Oswal Financial Services Ltd.

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