Financial Planning

Five mistakes that jeopardizes financial freedom

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Financial Freedom

It is not the income that brings financial freedom, but it is the balance between income and expenses that helps you attain it. Managing money is an art and a science. People work hard to fulfil their aspirations, but a few mistakes may jeopardize all their efforts. Despite having adequate income, people find it difficult to save for their future goals. Anxiety steps in when they face a sudden, unexpected expense.  Here are the most common mistakes which become an obstacle in achieving financial freedom.

Poor cash flow management

Cash Flow Management refers to managing the inflow and outflow of money. People simply earn and spend without looking into their future financial goals. If you are poor at managing your cash flow, then chances are that your bank balance may become zero much before the end of the month.  Lack of discipline may lead to overspending. Cash flow can be managed to a large extent by writing a monthly household budget. Once you write your household budget, you will be able to identify and control your not-so-important expenses.

Living beyond means

People tend to live in the present rather than worrying about their future. Although enjoyment is an integral part of life, it should not be achieved by jeopardizing our future. We buy things which we may not specifically need. Human beings are susceptible to societal pressure, which makes them do things which can adversely affect their money management. We seek acceptance from society, leading to impulsive purchases, which will give you instant gratification but may be the cause of financial dissatisfaction later on. This behaviour can be controlled by differentiating between needs and wants. Money should be judiciously spent on satisfying wants only after all needs, including saving and investing for the future, are properly met.

Overburden of EMIs

A loan is a necessary evil. In the current economic conditions, with rising inflation and stagnant income levels, loans have become a necessity to meet certain needs. Loans should be taken only to satisfy needs, not wants. Home loans and even vehicle loans to some extent can be deemed as a necessary loan, whereas personal loans for utilization of going on vacations should be deemed as unimportant. The interest rate on personal loans is much higher compared to secured loans, leading to further strain on cash flow.  How much you borrow, it should be determined based on your repayment capacity. EMI should be such that it does not cause unnecessary strain. Use a credit card only if you can pay the bill before the due date. Any outstanding on a credit card may become a financial burden for you due to the high interest rate applicable to it.

No efforts to increase income

Inflation causes a dent in our cash flow management. Inadequate funds are the major reason for not saving and investing for the future. In the absence of adequate inflow, we have to compromise on our savings and investments to take care of our fixed and discretionary expenses. We must think of improving our income if it is not adequate. We must upgrade ourselves to earn more. Upgradation can be in terms of upgradation of job, upgradation of knowledge, or exploring new avenues to earn money. The advent of technology has opened new doors for earning income. We can explore new opportunities while still carrying on with our primary job.

Improper asset allocation

Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. Financial goals, if realistic, can be achieved through proper asset allocation. Poor Risk tolerance and inadequate knowledge of financial instruments cause improper asset allocation. Overexposure in traditional saving schemes like fixed deposits and small savings schemes limits the scope of wealth creation. Improper asset allocation is the major cause of jeopardizing our financial freedom.

Invest in hybrid funds to beat market volatility

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Hybrid fund

Equity markets have been volatile for the last few months. Markets move up one day and correct the next day, causing anxiety for some investors. In the absence of clear direction retail investors find it difficult to enter the equity market. If current volatility in equity markets is a cause of concern for you then consider hybrid funds in your portfolio. These funds seek to offer the benefit of both worlds in a single investment structure, as equity has the potential to deliver attractive returns in the long term while debt provides relative stability to the portfolio. Hybrid funds can be further classified as equity-oriented or debt-oriented hybrid funds. Equity-oriented hybrid funds are generally known as balanced funds, while the debt-oriented hybrid funds are better known as Monthly Income Plans or MIPs. Usually, balanced funds are allocated in the ratio of 65% equity and 35% debt, including some cash. Monthly income plans, on the other hand, generally allocate 5% to 25% in equity and balance in debt securities. Unlike a pure equity fund, the growth potential as well as risk of volatility is limited to the equity allocation in these funds.

Funds with dynamic asset allocation

Within hybrid funds, there are low-volatility equity funds or balanced advantage funds. These funds tend to have portfolios with a mix of stocks and debt securities that respond to market conditions as perceived by the fund manager. Equity exposure may go as high as 80% in these funds when markets are favourable for investment. Stock selection in these funds is based on the valuation yardstick, such as price-to-book value. These funds are structured to invest in equities when markets are cheap and book profits when markets are rising, thus minimising risk and aiming to provide good long-term returns. The objective of these funds is not only to beat the volatility but to provide long-term growth. Several studies have confirmed that the performance of a portfolio is majorly determined by asset allocation and, therefore, getting the right asset allocation that works well with the market conditions is a must for creating long-term wealth. Tax efficiency is another advantage of these funds. Due to their minimum 65% allocation in equity, these funds offer taxation like equity funds. If the holding period is longer than a year, returns are tax-exempt; otherwise, they are subject to short-term capital gains tax.

Suitable for all investors

Due to limited exposure in equity, these funds are less aggressive compared to pure equity funds and hence possess less risk. These funds are suitable for investors who are looking for a lower risk without compromising on the long-term growth potential of equity. It can be a preferred solution for investors looking for dynamic asset allocation but find it difficult to rebalance the portfolio according to market conditions. These funds can also be considered by first-time equity investors who want to enjoy the benefits of equity investment but worried about volatility as a nature of equity market.

Top up health plans: Are they worth the buck?

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What is the size of your health cover? Rs 2 lakhs, Rs 3 lakhs or Rs 5 lakhs? This sum assured, as it is called in insurance parlance, could cover minor hospitalisation costs. However, life-threatening ailments such as heart surgery and cancer come with a heavy price tag, and your health insurance may really fall short of medical expenses.

With medical inflation growing in double digits, year after year, inevitably, hospitalisation expenses are also on the rise. In such an event, your health cover could fall short of medical expenses and burn a hole in your pocket. Hence, there is a need to review your health insurance and cover any shortfall. In such a scenario, it makes sense to go for a top-up plan as they are at least 20% cheaper than going for a new health cover altogether.

What is a top-up plan?

It is a regular indemnity plan that covers hospitalisation costs only after a certain threshold limit, which is called a deductible in insurance parlance. One portion of the claim is borne either by the policyholder or the other insurer. Once the policyholder pays off that component, the top-up health cover kicks in.

Let’s assume you have taken a top-up plan of Rs 10 lakhs and it has a deductible limit of Rs 4 lakhs. If the total hospital bill comes to Rs 7 lakhs, you need to pay Rs 4 lakhs and the balance (Rs 3 lakhs) is paid from the top-up plan.

Why are top-up plans cheaper?

No, there are no caveats here. These plans are at least 20% cheaper than individual health covers, mainly on account of deductibles. These deductibles protect top-up plans from frequent claims. Hence, the insurers are able to keep the pricing of such plans lower.

When does it make sense to opt for a top-up plan?

Given the spiralling medical costs, a basic health cover of Rs 3 lakh to 5 lakh is not enough. A top-up plan is definitely a good way to bridge this shortfall. However, it’s not always the best option

  • If your base cover is high, say Rs 5 lakh or more, it makes sense to opt for a top-up plan
  • If your base cover is low, say Rs 3 lakhs or less, it’s better to opt for another individual health plan since top-up plans are mostly reimbursement plans

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Top-up plans: What’s available in the market?

There are two kinds of top-up plans available: a basic top-up plan and a floater plan.

Basic top-up plan:

The policyholder will get the benefit of a top-up plan only if the bill exceeds the deductible limit in a single event of hospitalisation. For instance, if an individual’s hospitalisation bill is Rs. 5 lakh and the top-up plan has a Rs. 3 lakh deductible, and the individual gets hospitalised twice in the year, the first time it costs Rs. 2.5 lakh and the second time Rs. 2 lakh, the top-up plan will not get triggered at all. The total bill overshoots the limit of Rs. 3 lakh; however, each event of hospitalisation is well within the deductible limit.

Floater plan:

With a floater plan where two members get hospitalised with bills of Rs. 2.5 lakh each, the top-up plan will not get triggered at all. Even though the total amount is more than Rs. 3 lakh, individually, they are within the deductible limit.

Aggregate claim:

This is an improvised version of the above-mentioned plans. This plan puts together several cases of hospitalisation to calculate the deductible limit. So if the total bill of all the events of hospitalisation crosses the deductible limit, the top-up plan will get activated.

Avoid these common money mistakes

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Money Mistake Image

Investment is the postponement of consumption. We invest our money with the expectation that it will grow with time. Since money loses value over time due to inflation, it must generate returns higher than inflation to protect its value.  Investors make several mistakes in their investments that hamper the objective of their wealth creation. For instance, investors are overweight in one particular asset or don’t diversify their equity portfolio across the sector. Here we are delineating seven major investment mistakes frequently committed by investors.

Money lying idle in bank accounts

It is a well-known fact that no interest is paid in the current account, and savings bank accounts offer as little as 4% interest. The money lying idle in a bank account loses the opportunity to grow. So, if you want to see your money grow, invest it in some good profit-making schemes based on your financial goals. You can at least park your money in liquid funds or short-term fixed deposits, even if you do not want to invest for the long term.

Overspending on credit cards

It is very easy to overspend on credit cards, which is a bad practice. Make sure that you buy only what you need. Do not use credit cards, if you cannot pay the bill on or before the due date. Remember, rolling credit attracts a high interest rate.

Foreclosing SIPs

Buy low and sell high is the key to making a profit, but you cannot always time the market. Hence, SIP is the best way of investing in mutual funds, especially equity-oriented. The whole idea of investing through SIP is that your cost will average out in the long term.  It is commonly seen that people cancel their SIP when markets underperform temporarily, which is otherwise the best time to invest. Investing more units of mutual funds through SIP when markets underperform results in huge profits when the markets reach new heights.

Trading based on tips

Equity markets are the best place for investment, but you need access to research and patience to earn a profit from your investment. Over 5000 stocks are listed on the BSE, but not all stocks are worth investing. Traders who trade by following the tips given by their friends and colleagues lose the most. Invest in the equity market with the help of a professional for your long-term financial goals. Do not invest in the equity market based on short-term trends.

Excessive use of Margins

Margin means using borrowed money to purchase securities. Margin indeed helps you to make more money, but in case the market falls, your loss exceeds manifold and sometimes even beyond your imagination. New investors always make the mistake of considering this Margin as free money, and this is where they make the biggest mistake. Margin is not free money. If we invest the margin money in any stock and the stock does not perform according to our planning and expectations, we end up with way too much loss without any gain. Ask yourself whether you would like to use your credit card to buy stocks? I know your answer is ‘No’. Using Margin is similar to using your credit card for buying stocks. Refrain from doing so.

Buying stocks that appear cheap

It is a common mistake to buy cheap stocks. Traders often compare the current share value of any company with its 52 week’s highest value. They consider buying cheap stocks as a good buy. For them, buying the shares of a company that was priced 40% higher last year is a good bet, but they forget that the higher prices of the shares last year are not going to give any benefit to them this year. Instead of buying the shares restlessly, it is better to investigate the reasons why the share prices of the same company have fallen so low. It is advised that the traders should always keep a critical eye on the fallen value of any stock, as it may hint at any foul play in the market.

Favor for any specific company

It is natural for us to love any company that always gives us good returns. We try to invest again and again in the same company to reap maximum benefits. But sometimes, we forget that we have bought the shares of the company for investment purposes, and the only aim of buying these stocks is to make a profit and nothing else. So, if at any time, you feel that the stocks of that company are not performing well, you should instantly stop investing in the same company. At the same time, you should look for any other company that is performing better. Favoritism in investment is risky for any trader.

It is very common to err while making investments. But learning from those mistakes, and identifying when you are repeating those mistakes and how you can refrain from them, is the key to successful investment. To refrain from mistakes, you have to make an intellectual and systematic program. Whatever you do with your money is up to you, but keeping these advises in mind will definitely help you create wealth over a period of time.

SIP, STP and SWP explained

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While we earn, investments are one of the major concerns. We all expect to get the best out of our investments. It is these investments that eventually help us build our dreams. While we make direct investments in shares and securities, there are huge risks involved along with a requirement for extensive market research. Thus, mutual funds have always been the best in terms of risk and returns. One can invest in mutual funds through numerous plans, such as Systematic Investment Plans and Systematic Transfer Plans, in addition to lump-sum investments. As we invest in installments through SIP and STP, we also have the choice to withdraw through Systematic Withdrawal Plan or SWP. Let us understand how these methods work.

Systematic Investment Plans

Under this method, one invests a fixed amount in a mutual fund scheme regularly on a particular date of every month. The benefit of investing through SIP is that one does not have to time the market. There are consistent deposits that lead to investing in the high as well as the low market that help you make the best out of the overall opportunities that were not easy to predict in advance. The investors are required to submit a one-time request for regular investment in the particular scheme of the mutual fund.

Several advantages one has while investing through the SIP. The essential benefit is having a dedicated and focused approach towards investment. Though there is a tremendous enthusiasm when people enter into the investment markets but fail to make regular investments. However, this plan reduces the burden later on as there is a predefined condition of investing a specific amount every month. So, one achieves an investment discipline. Also, one enjoys investment convenience. Another big advantage is rupee cost averaging. Because you get more units when market is down and lesser units when market is up, it helps to overcome risk of volatility and helps you generating better returns in long term.

So, the SIP system works where you have money in your bank account, and every month a fixed sum is transferred from your bank to the mutual funds.

Systematic Transfer Plans

The STP is a plan where one invests a lump sum amount in a particular scheme, mostly a liquid or money market fund and then transfer a particular amount to some other scheme in a predetermined interval. While the markets being very volatile and you do not want to take a risk with your money in the short term, you can choose to invest in equity mutual funds through systematic transfer plans. Thus, under the volatile market situations, investing in the STP scheme is better as you purchase units of equity funds in staggered manner and at also earn some returnson the balance amount in the liquid fund, where you park your moneyinitially.

Though returns from liquid funds are not very attractive, however you can expect better than what you receive from your saving bank account. Because a specified amount is transferred to the equity fund at a particular interval regularly, it helps in averaging the costs of investors.

So, The STP system involves investing a whole sum of money in mutual funds, mostly a liquid fund and selling some units of the same to further investing in equity mutual funds.

Systematic Withdrawal Plan

One can plan regular monthly incomes through the Systematic Withdrawal Plans. As per your requirement, you can choose to withdraw monthly as well as on quarterly basis. One usually opts for this plan to get a regular income after retirement to maintain cash-flow.

The SWP system works where you want to withdraw a fixed amount of money monthly or quarterly from your mutual funds to your bank account. It is exactly opposite of SIP.

Each opportunity has its own benefits. As per one’s objective and circumstances, one can choose the best option and get the best out of their earning to build their dreams better.

How to measure the risk of your mutual fund portfolio

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Measure the Risk Apr 29 2026 12 38 50 PM

You must have heard this line in all mutual fund advertisements. “Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.” Then you may wonder why you should invest in mutual funds. The reason you are investing in mutual funds is that they invest in a diversified portfolio of shares and securities. Moreover, professional fund managers are managing your money, and you bear the fund management charges for that. Then, where does the risk come in?

Yes, investment in mutual funds is less risky than investing in direct stocks, but that doesn’t mean that mutual funds entail no risk. The very nature of investment instruments that your pool of money gets invested in is subject to periodic movements. Share prices change each minute, debentures are dependent on the yields and the papers available during a particular period and deposit rates change with the company and time. As a result, no mutual fund can promise returns that it will deliver. Nobody can precisely predict the market movements. So when share prices across the board are plunging, your equity-mutual-fund performance will be bleak, and when companies are faltering on deposit payments, the mutual fund scheme will suffer too. Though professional fund management ensures the reduction of stock-specific risk, there are several other risks that mutual fund schemes still have to deal with and here are three different ratios, which will help you measure the risk quotient of your portfolio.

1) Beta

It measures the volatility of a particular mutual fund in comparison to the market as a whole. A beta of 1.0 indicates that the NAV of the mutual fund will move in the same direction as that of the benchmark index. If the Nifty goes up, so will the NAV of the mutual fund that has the Nifty as its benchmark. Similarly, if the markets go into a tailspin, the NAV of the fund will also fall.  If the beta is less than 1.0 indicates that the fund’s NAV will be less volatile than the benchmark index. On the other hand, a beta of more than 1.0 indicates that the investment style of the mutual fund is aggressive and more volatile than the benchmark index. If you are an aggressive investor, you can opt for these funds as they move up more than the benchmark, but the fall will also be steeper. If you are a conservative investor and prefer low-risk investments, you should consider mutual fund schemes with low beta.

2) R-Squared

Beta cannot be considered as a standalone measure; it needs to be considered along with ‘R-squared’, which measures the correlation between beta and its benchmark index. The combination of these two statistical measures helps you understand the risk of a mutual fund more accurately. Typically, ‘R-squared’ values fall in the range between 0 and 1, where 0 represents no correlation, and 1 represents full correlation. The lower the R-squared, the less reliable the beta, and vice versa. In other words, the beta of a fund has to be trusted only if the R-squared value is between 0.75 and 1. If the R-squared value is less than 0.75, it indicates the beta is not particularly useful as the fund is being compared against an inappropriate benchmark index. This fund will not mirror the returns of its benchmark index.

R-squared of an index fund, which invests in the same securities and in the same weightage as the underlying benchmark index, will be one. Given that Beta and R-squared are calculated based on historical data, it makes sense to consider Beta and R-squared before investing.

3) Standard Deviation (SD)

Standard deviation measures the volatility of a mutual fund by showing how much the return on a fund deviates from the expected returns based on its historical performance. It computes the total risk, which includes market risk, security-specific risk and portfolio risk of a mutual fund.

In simple words, standard deviation tells you how consistent the performance of your mutual fund is over a period of time. The higher the SD, the higher the volatility of the net asset value (NAV) of the mutual fund and the riskier your investment. However, you should use SD only when you compare a mutual fund with its peer group mutual funds. For instance, you should compare the SD of a large-cap fund with another large-cap fund and not with a mid-cap or a small-cap fund.

What is Mutual Fund? Explained in Hindi.

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A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes.