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Be realistic in your financial objectives with Mutual Funds

The events of 2008 should be quite enough to cure anyone of either making or believing in predictions. Of course, there’s no shortage of people who claim to have foreseen bubbles in this or that asset class. Some of them are even right. However, no one, absolutely no one, foretold the inter-connectedness and the mutual reinforcement of the various disasters that overtook the world’s economy during this past year.
I could argue, with some justification that the carnage of 2008 is over and various investment markets have already discounted a very dismal picture indeed. On the other hand, I could also argue that much of the good news is merely a side effect of factors like the oil price crash and suddenly lower prices which themselves foretell even deeper trouble ahead.

Some analysts will guess one way and some the other and the lucky ones will get to pretend that they knew something that others didn’t. However, if you are a retail, non-professional investor, then none of this should actually matter to you. The only useful approach would be one that doesn’t have to be fine-tuned to market conditions. The right strategy for 2009 has to be one which would also have been the right one for 2007 or 2008 and will be the correct one for 2010.

Here’s what I think that strategy is. Take a look at your own life and try and make a liberal estimate of how much of your savings you would need to tap into over the next five to seven years. This would include some sort of an emergency amount, plus predictable big-ticket expenses like weddings, education, the down payment on a house and such things. This is the amount you should hold in debt investments which could be anything from PPF to short-term debt mutual funds. The rest should be in diversified equity mutual funds with a good long-term track record.

Any fresh investments into equity funds should be done gradually and continuously regardless of the state of the markets. Don’t invest in too many funds — four or five is enough diversification. You’ll have to do a little bit of homework to find funds with a good long-term track record but it’s not difficult.

As for insurance, make a liberal estimate of the amount of money your dependants will need if you die soon. For this amount, buy an inexpensive term insurance for the longest period possible. As for ULIPs, avoid them like the plague. They are an expensive and non-transparent mis-mash of insurance and mutual funds that appear to be designed solely to enrich insurance companies and agents at your cost.

I know all this sound too simple, but good investment strategies are generally much less complex than bad ones. And they don’t change just because a number on the calendar changes.

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