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Dear Qualified Financial Advisor,

A few days ago, I caught up with some friends, and our conversation shifted towards money and how we handle our personal finances. It got me thinking about my own savings and whether there’s a way to make them work harder for me without sacrificing easy accessibility. For quite some time now, I’ve been keeping my savings in a regular savings account. However, lately, I’ve started wondering if there are better options out there that can offer higher returns while still allowing me to access my money quickly when needed. After all, unexpected expenses can pop up, and having liquid funds available is crucial. In my quest for financial knowledge, I’ve turned to the internet and stumbled upon quite a few financial products related to smooth liquidity. Apparently, these types of investments can provide better returns than traditional savings accounts. But here’s the catch: I’m unsure which one suits my needs best. I’m a bit concerned that I won’t have enough if I don’t diversify wisely. Any advice would help!

An Indecisive Planner

Dear Indecisive Planner,

I appreciate your proactive approach to exploring ways to make your money work harder for you while maintaining easy accessibility. Traditional savings accounts often offer low-interest rates that may not generate substantial returns in the long run. It’s important to consider alternatives to maximise your wealth creation.

One significant factor to be mindful of is the impact of inflation on your savings. Inflation refers to the increase in prices of goods and services over time, which erodes the purchasing power of your money. If the interest rate on your savings account is lower than the inflation rate, your money will actually lose value over time.

For instance, if you have Rs 100 in a savings account that earns 1% interest and the inflation rate is 2%, your money will be worth 98 in real terms after one year. This is because the interest you earn will not be enough to offset the loss of purchasing power caused by inflation.

To combat this, it is wise to consider investments that historically outperform inflation.

Equity Mutual Funds: Equity mutual funds are a type of investment fund that invests in stocks. Historically, stocks have outperformed other asset classes, such as bonds and savings accounts, over the long term. However, stocks can be volatile in the short term, so they may not be suitable for everyone.

Debt Mutual Funds: Debt mutual funds are a type of investment fund that invests in bonds. Bonds are loans issued by companies or governments. Bonds are generally less volatile than stocks, but they also offer lower returns. Debt mutual funds can be a good option for investors seeking a safe and steady investment.

Fixed Deposits: Fixed deposits are a type of investment that offers a fixed interest rate for a specific period of time. They are considered a safe investment, but they tend to provide lower returns compared to other investment options.

Gold: Gold is a precious metal that has historically served as a hedge against inflation. However, gold is not a liquid asset, which means it can be challenging to sell quickly. Additionally, gold prices can be volatile, leading to fluctuations in its value.

When comparing investment options, several factors need consideration. First and foremost, define your financial objectives. Are you saving for retirement or a down payment on a house? This will play a crucial role in determining the right mix of investments for your portfolio.

Next, it’s essential to assess your risk tolerance. Some individuals prefer lower-risk options, while others are more tolerant of higher-risk investments. Take some time to reflect on your past decisions, emotions, and goals to understand your own risk-taking capacity better. By learning from your experiences, you can make more calculated choices that align with your long-term objectives.

It’s crucial to consider your time horizon when making investment decisions. Short-term goals may require safer investments like bonds or money market funds, while long-term goals can accommodate more risk with investments like stocks that historically perform better or react less to market fluctuations.

Conduct thorough research to understand the risks and potential returns associated with different investment options. Utilise financial publications, explore online resources, and consult with a financial advisor to gain insights. Starting with smaller investments allows you to learn and minimise risks as you gain experience.

Lastly, regularly review and rebalance your portfolio, keeping it in sync with your evolving financial needs and risk appetite.

Remember to evaluate the terms, interest rates, fees, and limitations of different financial products thoroughly before making decisions. Regularly reassess your financial goals and adjust your savings strategy accordingly.

With the right knowledge and guidance, you can make informed decisions that support your financial aspirations. Seeking advice from a qualified financial advisor can help you address your financial disposition effectively.

Viral Bhatt
Chairman, 1 Finance Advisory Committee for Qualified Financial Advisors — Mumbai Chapter

Viral Bhatt

By Viral Bhatt

Founder, Money Mantra

Viral Bhatt has a post-graduate degree in Financial Planning, and has over a decade of experience in providing financial advice.

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