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Plan Long-Term For Rewarding Investments

| 9/6/2012 9:00 PM Thursday

Chalking out your investment strategy by following some basic thumb rules can help you build a corpus over your investment period to fund your personal goals.

KEY POINTS:

  • One can begin investing with as less as Rs 500. The key is to first get into the habit of saving and investing regularly, and then, to gradually increase the amount.
  • Equity, which is the most appropriate asset class for building large sums to achieve long-term goals, can yield the best results over longer time periods. Therefore, the sooner one starts investing, the better it is.
  • Factors like time horizon and risk tolerance play a major role in deciding the appropriate asset allocation. Once the asset allocation is decided, the next step should be to select the right investment options.

While it is a well known fact that making investments is crucial to one’s financial future, not all of us do it the right way. Investing is generally perceived to be a complex exercise. In reality, it is a simple process that requires investors to be disciplined and to have patience and perseverance to succeed. The following are some steps towards successful investing:

Start Investing Early
Many investors delay the start of their investment process. While some of them do so fearing that they do not have enough money to start investing, there are others who don’t start investing thinking that it is too early to do so.

The fact, however, is that one can begin investing with as less as Rs 500. The key is to first get into the habit of saving and investing regularly, and then, to gradually increase the amount. 

Similarly, it is never too early to start investing, especially for long-term goals. Generally, one requires large sums of money for goals such as children’s education, marriage and retirement planning. While many investors get overwhelmed by the very thought of having to create a large corpus, the fact is that if one starts investing early, the magic of the power of compounding makes this possible even by investing moderate amounts in a disciplined manner over a prolonged period.

Besides, equity, which is the most appropriate asset class for achieving these goals, can yield the best results over longer time periods. Therefore, the sooner one starts investing, the better it is.

Have A Plan In Place
Many investors start investing without having an investment plan in place. The right way to begin investing is by establishing one’s investment goals and deciding a time horizon for each of these goals. One also needs to set targets, as that helps in ascertaining how much money needs to be invested to achieve them.

Factors like time horizon and risk tolerance play a major role in deciding the appropriate asset allocation. For short-term goals, the focus should be on debt and debt-oriented instruments as it is crucial to protect capital. While investing for long-term goals, priority should be given to an asset class like equity that has the potential to provide a positive real rate of return (i.e. nominal returns minus inflation). This goes a long way in ensuring that at the point when one completes the time horizon, one has enough for each of the long-term goals. This process also ensures that you don’t lose sight of your investment goals. In other words, a well-defined time horizon prepares investors to tackle volatility from time to time and helps them remain focussed on their goals.

Once the asset allocation is decided, the next step should be to select the right investment options. Investment options like mutual funds should form the core of the portfolio, as they are not only diversified in nature and tax efficient, but are also well regulated. Besides, mutual funds offer a variety of products to choose from and complete transparency in terms of how one’s money is deployed as well as regarding costs. Needless to say, past performance alone shouldn’t be the main criterion for selecting a scheme. While analysing long-term performance is important, the suitability of the fund should be given the top billing.

It is equally important to choose the right option while investing in a mutual fund scheme. For example, while investing in an equity fund for retirement planning with a time horizon of 20 years, one should opt for the ‘growth’ option as it would ensure the benefit of compounding. On the other hand, a ‘dividend payout’ option would be more suitable if the intent is to earn income to take care of one’s liquidity needs. While the process of scheme selection gets due attention from investors, this aspect is often ignored. As a result, investors fail to get the desired results.

Ensure Continuity In Investments
It is quite common to see investors making the mistake of treating investment as a one-off activity. The truth, however, is that investment is an ongoing process that requires individuals to follow a disciplined approach. This not only helps in putting aside a part of one’s income for future use but also in benefiting from ‘averaging’.

Investors often panic during falling markets and are tempted to discontinue SIPs without realising that investments made during such periods will get them more units. Therefore, one needs to carry on and reap the benefits in the long run.

Hemant Rustagi
CEO, Wiseinvest Advisors

 

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