Financial Cocktail Samosas: Bitesized Money Morsels For You, 12/04/2023

As Climate Fears Mount, What’s in for ‘ESG’ Funds?

With sustainability taking strategic importance in the current operating environment, ESG (Environmental, Social and Governance) has become quite a buzzword in Indian as well as global markets.

What is an ESG Fund and how does it work?
ESG funds, also known as sustainable or socially responsible funds, shortlist companies that score high on ESG parameters. Following are some of the parameters used:

  • Environmental factors: This includes a company’s effect on the environment, such as its greenhouse gas releases, energy usage, water usage, waste management practices, and the impact of its outcomes or services on the environment.
  • Social factors: A company’s influence on society, such as its labor practices, human rights policies, community relations, and its bearing on public health and safety figure here.
  • Governance factors: Autonomy of its board of directors, managerial compensation practices, and clarity in financial reporting are covered here.
How do ESG Funds Work and who should go for it?
ESG funds work like any other mutual fund where fund managers use their discretion to choose the companies based on their ESG standards.
  • Alignment with Personal Values – One of the main advantages of ESG investing is that it allows investors to associate their investment decisions with their values. By investing in companies that highlight sustainability, social responsibility, and good corporate governance, investors can support businesses that positively impact the world.
  • Financial Performance – Contrary to general belief, investing in ESG funds does not always mean forgoing financial performance. Some studies have found that ESG funds can perform quite well compared to traditional investment funds. Eg, a study by Morningstar found that 58% of sustainable funds outperformed their conventional counterparts in 2020.

ESG funds allow investors to connect their investing selections with their beliefs while potentially lowering long-term risks. But, whether or not to invest in ESG funds is determined by personal investment objectives, risk tolerance, and principles.

(Contributed by Kritika Saini, Assistant Manager, Team Sukhoi, Hum Fauji Initiatives)

Being Too Passive with Your Investments?

Over the last few years, a view has emerged to just choose a few passive funds – equity and/or debt – for investment, put your money in it and go to sleep. However, considering investing as a one-time activity to meet your future financial goals and the targeted objectives of investing may not really work.

Let’s understand this with an example.
Suppose you have been saving over the years for purchasing a house and the time for the purchase is next year. You look at your 60% Debt: 40% Equity portfolio and find you have accumulated only Rs 1.0 crore till now while the house costs Rs 1.50 Crores. You also have FDs worth Rs 25 Lakhs but that still leaves a shortfall of Rs 25 Lakhs. You are averse to taking a loan. You connect with a financial planner who analyses your past investments and informs you that your asset allocation (Debt to Equity) in the initial years was not correct, a review of the goal attainment was not done over the years and some passive funds including index funds should not have been taken at all by you. And now, with the goal of house purchase being so near, there is nothing you can do but to take a large loan of about 40 Lakhs to cover the shortfall and other associated expenses including minimal renovation.

So, what really went wrong there?

  1. Feeling that Passives will always perform the best: There are passive funds and then there are passive funds. All may neither be the best for you or may not be able to change the portfolio as per changing times. One recent glaring example was almost all the actively managed funds barely having Adani group stocks in their portfolio while passive index funds having them in large numbers due to the index having them, leading to large underperformance of passives.
  2. Portfolio Diversification: Diversification helps reduce risk by spreading your investments across multiple asset classes and sectors.
  3. Risk Tolerance: A portfolio should reflect your risk aptitude and attitude, in addition to the timelines of your goals, especially the critical ones.
  4. Tax Considerations: Different types of assets are taxed differently. Let your financial advisor make you wise in this while investing and also when the time for taking out money from the portfolio has come.
  5. Cash Flow: You and your financial planner need to know how much cash flow you have from your existing assets to determine how much you can invest and how much risk you can take. This will help keep your portfolio in alignment with your financial goals and objectives.

It is your money, your dreams, and your life. Be active about it and choose the right combination of assets and their investment avenues to make sure your money works as hard as you.

(Contributed by Abhilash S Rana, Associate Financial Planner, Team HNI Desk, Hum Fauji Initiatives)

Good Financial Behaviour – Your Savior

Are you in a state of mind where you see financial well-being as having a luxury car or a big home?

Then think of a life in which you may make decisions that allow you to enjoy life while being able to completely fulfill all of your present and future financial responsibilities.

What actions would you engage in if given the chance to achieve this ‘state of being’?
Try something different as below:

  • Money management – Simply put, you need to control what enters and exits your system. Everybody must ‘live within their means if they want to be financially secure. Being able to tell the difference between wants and needs, being disciplined, and being frugal could be part of this.
  • Prevention is better than cure – Doing your research and seeking knowledge about your financial decisions is the second behavior you must exhibit in order to achieve financial well-being. When making major financial decisions, you may consult a spouse or family member. You could also try to learn from other people’s mistakes. If it’s a technical decision, you can learn more by talking to experts like financial planners.
  • Plan your own success – Planning and setting SMART (Specific, Measurable, Actionable, Realistic, Timely) goals is the third behavior that helps with financial well-being. At their most fundamental level, those who engage in this kind of behavior might develop a spending plan to figure out how they will spend their money in the short term.
  • The Flashback – Your financial well-being will not be attained despite all of your management, planning, and knowledge unless you follow through with the above behaviors. You are more ‘future-oriented’ than impulsive or short-term thinkers if you rewind yourself back to the above behaviors.

“No matter what financial habit you decide to take up, you will be that much closer to achieving your financial goals. All that matters is that you start.”

(Contributed by Gautam Arora, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

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