Financial freedom for Indians: What it means and how to achieve it

Three experts explain how planning and patience can you give the cushion of savings, investments, and cash on hand

As India celebrates 75th Independence Day, Business Standard spoke to three experts to understand what financial freedom is, and how people can achieve it. For most people, such freedom means having the financial cushion of savings, investments, and cash on hand. Add to that, a decent nest egg for retirement or the freedom to pursue any career without the need to earn a certain amount of salary. Start investing as early as possible, invest across asset classes, keep some aside for the rainy day, and plan for retirement when retirement seems far away. 

'If investing confuses you, opt for Fund of Fund'

S Naren, executive director (ED) and chief investment officer (CIO), ICICI Prudential Mutual Fund

Over the past year and more, a lot of young investors have invested in initial public offerings (IPOs) irrespective of their aggressive pricing. This is worrying from a sentimental angle. I would urge every youngster who is keen on participating in wealth creation through equities to approach IPO investing with a lot of caution. Factors like trailing price to earnings, trailing price to book, dividend yield, and ROE of companies that they are investing in should be evaluated carefully.

Never become overconfident about the market, as one can never be always right. It is with experience that one realises that the market is much bigger and, hence, one has to be careful most of the time. This resulted in our looking at checklists, which aid in reducing the number of mistakes one can commit. Make your own investing checklist.

Do not invest in a narrow area but practise across allocations and invest across asset classes, viz., equity, debt, gold, etc. When one invests in a narrow area or a single asset class, there are a lot of risks. Do not let the sharp rally in any asset class lure you into going all in. Investors from time to time tend to go overboard on a particular asset class. Being conservative here means sticking to one’s asset allocation and maintaining a balanced approach to investments. There is no get rich quick scheme. Be very careful about derivatives trading. Keep away from leverage. Be conservative at an expensive valuation and aggressive at a relatively cheaper valuation. Do not reverse this behaviour. The biggest mistakes in investing happen when market valuations are elevated, rather than when valuations are low.

Invest in debt. Investors who invested in debt in 2017, 2018 and 2019, especially in certain categories, and then switched to equity during the market correction of 2020, would have achieved sizable gains. We believe that debt is again set to become an interesting asset class, and investors can look forward to better returns than what debt has delivered in the recent past.

If investing confuses you, opt for a Fund of Fund (FoF) and leave the decision to the fund manager. There are a variety of FoF strategies that have the flexibility to invest across various asset classes, geographies, ETFs and schemes offered by various fund houses. So one can easily benefit from investing in them.  

'My advice for women would be to begin your investing journey as soon as you can'

Priti Rathi Gupta, founder and MD, LXME, India’s first neo-bank for women

Women need the confidence and awareness of their inherent qualities that make them good investors. All they need is to take the first step. Contrary to popular belief, investing is not a mathematical but a behavioural science, an aptitude that women can easily work with. However, not taking charge of your money can be one of life's biggest setbacks, leading to compromises on both personal and professional fronts. Hence, this is no longer a matter of choice but a hygiene factor, a life skill essential to a secure life.

My advice would be to begin your investing journey as soon as you can, even if it's with a tiny amount. Build your safety net, grow yourself a healthy retirement fund, and work towards your financial goals. Financial freedom is a very simple process if you cut out the noise. It is the only thing that will allow you to live life on your terms.

Most women in the LXME community group, we have observed, say: "I wish I had learned earlier. My finances would not be in a mess if I had done that. Particularly in the Covid-19 times, because of the passing away of the husband or father, women found themselves in a state of total disarray since the breadwinner was solely managing the finances: "I wish I had invested the day I started earning."

The power of compounding holds the greatest value in one’s financial journey, truly deemed as the eighth wonder of the world. "I did not realise that investing is so easy." Lack of awareness or half knowledge can often cause fear, and the simplest tasks seem intimidating. It is all in the power of taking that first step and then flight.

"I wish I had not put all my money in instruments that do not beat inflation."This will tell you the common mistakes that women make. The only way to avoid them is to engage in financial literacy, define your financial goals, and grow your money to meet them. The beginning can be with as little as Rs. 500, but it’s important to translate all that learning into action.

'Financial freedom is achievable; each of us simply need to have the discipline'

Lovaii Navlakhi, board member, Association of Registered Investment Advisers

As all of India gets set to celebrate 75 years of Independence, every heart is tinged with the tricolour. There are also timely conversations about every individual achieving financial freedom.

In his book 'Financial Freedom', Grant Sabatier defined seven levels of financial freedom, which apply to all of us.

You start with clarity--know where you are and where you want to go. You achieve self-sufficiency by earning enough (from your job or business plus your investments) to cover all your expenses.

Make sure you have enough breathing room to keep the home fires burning even if you miss a month’s salary. Target stability by clearing off all loans and putting away enough to cover you for at least six months. Flexibility is enduring stability when you can comfortably manage for two years, even if there are some unforeseen, large expenses.

When you can live comfortably off the income generated by your investments without having to depend on a salary cheque, you have achieved financial independence. This ought to be our goal and can be achieved by most of us with some expert help from a qualified financial advisor.

Sabatier’s last level of abundant wealth, when you have more money than you will ever need, might sound rather utopian to most of us.

In his inaugural address, independent India’s first Prime Minister, Jawaharlal Nehru, said: "We have to labour and to work, and to work hard, to give reality to our dreams."

Financial freedom need not be a dream. It can become a reality for all of us with some expert help, hard work, and by adhering to some simple principles. Know your goals. Earn before you spend. Don’t just save, invest. Monitor your investments. Borrow only if you must and repay as early as you can. Insure life and health. Be flexible and prepared to adjust and sacrifice in the interest of enduring financial freedom.

For many, retirement could well be the longest phase of their lives. To not depend on others for their finances will mean freedom. Therefore, it is crucial to create an adequate retirement corpus. As the first step, identify the amount to meet your regular expenses/ manage your lifestyle. Then add the one-off additions like the purchase of a car, planning for holidays, medical emergency corpus and gifts for grandchildren. Apply the relevant rates of inflation for each. Determine life expectancy – remember we are planning conservatively, so 100 years may just about be right. Finally, based on your risk profile, determine what your returns over inflation will be. Put this all in excel, or identify a financial advisor to work this out for you.

Simple as that sounds, this kind of financial planning requires certified expertise and ample experience. So, start your journey by investing in a carefully chosen financial advisor.

Ahead, freedom awaits!