Personal Finance

Don’t fret too much over your finances

B Venkatesh | Updated on January 24, 2018

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When your income is unstable, reduce anxiety by investing regularly in fixed income instruments



Anxiety about your finances is linked to your ability to keep income flowing in steadily. You must factor in anxiety when planning your investment portfolio. Here’s why.

Anxiety over income

The present value of all your future income is called human capital. It is important to integrate this with your investments. This is where financial anxiety comes into play.

Your financial anxiety may be high due to unstable human capital. For example, you may be earning well today but you may still worry about rising living costs and your income remaining stagnant. Or, you may be worried about job security. In such cases, you should invest in assets that cause lower financial anxiety. The reason is simple.

You possess two assets: human capital and investments. If one causes too much financial anxiety, the other should be relatively less stressful. So if your human capital is unstable, it’s best to invest in stable income products such as bank fixed deposits.

Step it up

But what if you have stable human capital and yet invest only in stable income products? This preference for stable products could be due to bad experiences. For instance, your family member could have lost considerable wealth in the stock market or other risky investments. But you should invest in equity to optimally integrate your human capital with your investments. The low risk from your human capital can be usefully combined with high risk from investment assets. You can hire a financial adviser to invest in equities if you don’t have the knowledge to make your own decisions. Or you can set up systematic investment plans in equity funds.

This way, you can invest in equity without being suddenly exposed to financial anxiety. You can even choose to invest first in index funds and then migrate to active funds.

In the final scenario, what if you have highly volatile human capital, but you are not really worried about your finances? This could be due to several reasons.

For one, you may not be concerned about your unstable human capital because you are either confident about your future or you have not thought about it yet. For another, you may be an aggressive investor willing to take high risks. Whatever be the reason, you should not be taking high risk with your investments when your human capital is volatile. You should first set aside money every month in stable income products through systematic investments.

One way is to invest in bank recurring deposits. Then, you can invest not more than 10 per cent of your total monthly savings in equity to satisfy your desire to own risky assets. The rest of the income can be used to meet your living expenses.

Balancing anxiety

It is natural for us to often, but not always, worry about our sources of income or our investments or both. In essence then, your financial anxiety works as a barometer to determine whether you have optimally aligned your human capital with investment portfolio.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

Published on July 12, 2015

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