Golden
rule of investing
We all work so hard to
earn money and save it too but at the same time a lot of us commit the mistake
of thinking “saving is investing”. In today’s world, it’s very important to make
your money work for you and not just let it sit idle in bank account.
Factors like high cost
of living and high inflation makes it very important for an individual to be
financially secure for present and future too. This can be achieved by careful
financial planning. However due to lack of knowledge, individuals tend to
commit simple mistakes while making investment decisions leading to undesired
losses.
Mutual funds are one
of the most popular investment tools in India as it suits varying needs of
different investors. By following some
simple guidelines one can successfully create wealth for themselves and have
happy investing experience.
Read more to know the
golden rules of investing:
Set financial goals:
Clearly define your
financial goals, be it saving for your retirement, children’s education,
marriage or trip to an exotic destination. You should identify such financial
goals and invest accordingly to meet your short, medium or long term goals.
Once you have clearly defined financial goals you can select funds and
investment strategy based on returns goal and your risk tolerance capacity.
Start early:
“The sooner the
better”
The sooner you start
investing, the more time your funds will have to grow as you benefit from
"power of compounding" i.e. when the
interest on your principal investment also starts to grow. If you start
investing late, you will probably have to invest a larger sum to achieve the
target returns.
Over time,
the more interest (or returns) you reinvest, the more money you have working
for you, and the more you can earn. With compounding, you earn interest on the
principal and additionally earn interest on the interest.
Let’s see an example:
|
Simple Interest
|
Compound Interest
|
|
Rs 10000 invested for 10 year earning 10% pa would make Rs.1000 per year, At the time of maturity
after 10 years investor will get Principal Amt. Rs.10000 +Accumulated
Interest Rs.10000 i.e. Total earning=
Rs 20000
|
Rs.10000 invested for 10 year
earning 10% pa would make Rs.1000 at the end of first year, but in the second
year investor will earn Rs.1100.
At the time of maturity after 10
years the power of compounding will grow the principal amount of Rs.10000 to
Rs.27070.
|
Hence it’s clearly
seen that with compounding we earn interest on principal and also earn interest
on interest.
Compounding investment
earnings can convert your small investments into a significant sum over a period
of time. One should take advantage of compounding by starting saving and
investing wisely as early as possible.
Let’s see an example to know
how compounding can work for us by starting investing early:
|
Investment started at age:
|
Amount Invested
|
Compounded Interest (Annually)
|
Corpus at Retirement age of 60
|
|
25
years
|
Rs.1,00,000
|
10%
|
Rs.32,63,865.04
|
|
35
years
|
Rs.1,00,000
|
10%
|
Rs.12,05,694.50
|
The
above example clearly shows that time is money - The earlier you start, the more time compounding has to work for you,
and the wealthier you can be.
Investing through Systematic investment plan (SIP) is also very effective to beat
market volatility. A SIP allows you to invest in any mutual fund by making
smaller periodic investments instead of a lump sum one-time investment.
Do
Goal based comprehensive financial planning
v Risk analysis
& Insurance Planning:
calculate your human life value and buy
appropriate cover for your associated risk in day to day life i.e. Health
insurance, critical illness cover, personal accident cover, term plan &
assets insurances like your home, shop, car & jewelry etc.
v Retirement planning:
Plan post retirement expenses for you
& your spouse so that you do not have to compromise or be dependent on someone
to maintain your lifestyle & standard of living post retirement. You should
also plan your investments by keeping appropriate wealth creation & impact
of inflation on wealth depletion in mind in your non-working years of life.
v Investment Planning- work out how much
you want to save at what rate and how long so that you can achieve all your
short, medium n long term financial goals.
v Tax planning- Plan & see how best
tax savings you can do to decrease your tax outflows.
v Estate planning - Plan transfer of
assets to the next generation smoothly by WILL or trust set up.
Diversification and asset allocation
Diversify your
investments among multiple asset classes such as equity, debt, gold, property
etc. to reduce risks. The idea is to not put all your eggs in one basket. Spread
your investment across sectors and market caps; avoid holding concentrated
portfolios or investing in similar funds.
We often believe that our portfolio is fully
diversified after investing across large caps,
mid or small caps, energy, Infrastructure, Information technology stocks. However
we have invested just in various sectors of equity.
It’s important to have a balanced portfolio investing in various asset classes
to maintain consistent performance. An investor should always aim to beat
inflation.
Please refer to the below slide to see the returns generated by various asset classes over a period of time. It clearly shows that Equity is the best asset class and outperforms all other.
Keeping Patience and cutting unnecessary noise, info & negative emotions pays:
To create wealth and
see the true potential of equity investment stay invested for long term, not 6
months or so but eight to ten years or more.
Please refer to the
above shown slide to see how equity gives best returns over a longer period of
time.
Do not panic
due to short term fluctuation in market.
The short term volatility in the market will not adversely affect your
equity investment in the long run. If we have invested in companies with strong
fundamentals, we can achieve our financial goal in the long term by staying
invested during market volatility. Keep patience and cut all unnecessary noise, info & negative emotions pays in art of investing.
Seek & hire Professional advice:
Work with a qualified and
certified financial advisor or planner who can devise an investment strategy to
help you achieve your financial goals. An expert advice can help you in making
informed decision, minimizing risk and taxes and help you create wealth.
Review regularly:
It is very important
for an investor to monitor and assess the performance of investments on a
regular basis. This evaluation will help in taking steps to improve overall
performance of your investments and achieve your all financial goals in short
or medium or long term.
Investor should have
realistic expectation from their investments and focus more on their goals and
advise of their financial planner or advisor; we need to remember that markets
move upwards as well as downwards.
During market corrections one has to keep calm and have faith that
market will bounce back again once either liquidity or sentiment or Economy and
our corporate earnings of listed companies goes up and hold on to their
investments in line of their financial goals. Take time to review your
investments, take help from a qualified professional as they offer expert
advice and work in client’s interest. Be
patient, keep away from negative emotions like Fear, greed, temptation, herd
mentality or panic etc. and think long term. Keep your investment strategy
simple, focused and goal oriented.
Happy Investing!!
Nidhi Srivastava
Manish Kr Pandey
#+91-9830040603
Email- fernwealthadvisors@gmail.com
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