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Never Too Early To Invest For Long-Term Goals

| 8/9/2012 9:00 PM Thursday

To build a corpus that can actually help you meet major financial requirements, make sure to invest in the right options keeping in mind the time you can nurture your portfolio for.

KEY POINTS
  • Investing without a clear time horizon often results in edginess in investors’ behaviour each time the market turns volatile, at times prompting them to make ad hoc decisions.
  • Investing early is a very simple yet powerful method to achieve long-term goals. The earlier you start, the longer your investments have the time to grow.
  • It is important that you invest in those options that have the potential to give you a positive real rate of return, i.e. returns minus inflation.
  • A short-term investment strategy should focus on stable principal value through a portfolio comprising interest-bearing securities, while a long-term strategy should focus on an asset class like equity that has the potential to beat inflation over longer time periods.

It is quite common to see individuals investing without a clear time horizon, i.e. without having a clear idea about how long they can remain invested. This often results in edginess in their behaviour each time the market turns volatile, at times prompting them to make ad hoc decisions. In the process, many investors end up losing sight of their long-term goals.

Besides, since long-term goals like children’s education and marriage as well as planning for retirement generally require a large corpus, many investors keep postponing their investment process either because they get overwhelmed by the amount required or because of the feeling that they will not be able to achieve their goals with the small sums of money that they can afford to invest.

Then, there are investors who invest in traditional options like fixed deposits, bonds and insurance products such as endowment plans, thus ending up putting themselves at a great disadvantage. Since these options provide lower returns, such investors struggle to beat even inflation.

The fact, however, is that investing early is a very simple yet powerful method to achieve long-term goals. The earlier you start, the more time your investments have to grow. In other words, investing early ensures that there are no shortfalls in the targeted amounts.

However, it is equally important that you invest in options that have the potential to give you a positive real rate of return, i.e. returns minus inflation. This factor is crucial considering the escalating costs of achieving long-term goals. Thus, you must consider the long-term impact of inflation on your investments.

Remember, the level of inflation risk depends on the length of time that you have to achieve your investment objectives. For a shorter time horizon, volatility is a bigger risk than inflation. That is why a short-term investment strategy should focus on stable principal value through a portfolio comprising interest-bearing securities, while a long-term strategy should focus on an asset class like equity that has the potential to beat inflation over longer time periods.

It is important to know that for long-term investment, the average rate of return becomes more important than volatility. It is a proven fact that over the longer term, volatility tends to work itself out due to the good years being offset against the bad ones. Besides, for a long-term investor, compounding plays an important role. Simply put, compounding helps you make money on the money that you have already earned.

Remember, the way you save as well your investment strategy will depend on many factors like how much you wish to save and how long it will be until the money is needed. Mutual funds can provide an excellent investment vehicle for your long-term goals. They offer diversification, flexibility and simplicity. In addition, mutual funds are a tax efficient vehicle that can help you accumulate more over the years.

A steady plan, both in terms of savings and investments, helps in pursuing financial goals. Considering that most investors invest on a regular basis to achieve their long-term goals, a Systematic Investment Plan (SIP) can be a great tool to benefit from averaging as well as the power of compounding.

Under an SIP, you invest a fixed sum, say Rs 5000, every month. You buy fewer units when the stock prices are high and more units when the prices are low. Besides, you take advantage of the fact that the stock markets generally go up over a period of time, because of which your average cost price tends to fall below the average NAV. This ‘averaging’ ensures that you can buy at different levels without having to worry about market ups and downs.

If you are not comfortable with a 100 per cent exposure to equity funds, there are equity-oriented balanced funds. While the equity portion in these funds aims to provide growth, the debt portion provides stability.

Needless to say, as you start the process, don’t forget that risk is an inherent part of investing and also that there is a direct co-relation between performance and risk.

 

Find More Articles on: DSIJ Magazine, In Focus, Personal Finance, Mutual Funds

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