5 minsMarch 16, 2018
Many individuals save enough for their future; and even misconstrue savings for investments. But let us apprise you, in reality, these two facets to wealth creation are different.
Merely putting money aside, under the mattress or in a vault, after meeting your expenses and liabilities is unproductive. In times where the inflation is eating into your hard-earned money, you need to move a step
forward and invest ––– more importantly, invest wisely!
Because ultimately you want money to work for you to achieve future financial goals; isn’t it?
Having said that, savings is the first step to investments. Therefore, it is imperative to handle personal finances prudently, so that your investible surplus can increase. Here’s what you should do:
- Make a monthly budget and see how best you can reduce expenses.
- Refrain from purchasing unwanted things. When you go shopping have a list and avail of discounts/cash-back offers/reward points.
- Economise wherever possible; don’t go on a buying spree to avoid a pinch to your pocket.
- Avoid creating a mountain of debt, borrow beyond your means.
- Start saving at an early age. This way, the power of compounding can work to your advantage. You may start small to begin with, but save regularly and make sure you make a conscious effort to increase investible surplus.
Thereafter, the investible surplus needs to be invested. Investing by definition is an act of laying out your money saved for productive use with an expectation of earning return more than inflation to preserve purchasing power of money. It is
a process making your 'money saved' work for you.
Investing brings along the following benefits:
- Helps in wealth creation by earning rate of return (interest and/or capital gains) on your investments.
- Helps you address long-term financial goals viz. buying your dream home, your dream car, your children's education, their marriage, your retirement; amongst a host of other ones.
- Counters inflation
- Provides a financial security
- Gives you the financial freedom
But when you invest, follow a prudent approach. Take cognizance of your age, your financial health/circumstances, risk profile, investment objectives, financial goals, investment horizon, cost of investing, tax implications, and other aspects.
Moreover, when you pick investment avenues, do sufficient research to have the winning ones in your portfolio. Most importantly, these need to be in-sync with the aspects to accomplish the envisioned financial goals/investment objectives.
Further, make it a point to start saving and investing at early stage of life (a PPF account; because an early bird gets a bigger worm supported by a wider time horizon, which compounds wealth better. Let’s understand this better with an example:
(Table above is for illustration purpose only)
|Present age (years)||25||30||35|
|Retirement age (years)||60||60||60|
|Investment tenure (years)||35||30||25|
|Monthly investment (Rs)||10,000||10,000||10,000|
|Returns per annum||12%||12%||12%|
|Sum accumulated (Rs)||64,309,595 ||34,949,641 ||18,788,466 |
Mohan, Sanjay, and Ajay, three friends, had one goal in common: plan for retirement. All three wished to retire at 60.
Mohan being the smartest of the three began planning and investing at an early stage, at 25, and invested Rs 10,000 per month. Sanjay realised the importance of planning for retirement once he was 30, while Ajay realised much later, when he was 35.
With an advantage of wider investment horizon, Mohan’s investments could compound wealth much higher –– around 15 times (to Rs 6.43 crore); while Sanjay and Ajay’s money grew 9 times (to Rs 3.43 crore) and 6 times (Rs 1.88
crore) respectively, as depicted by the table above.
Hence, remember it’s never too early to save and invest. In fact, your wealth generation can get better if productive, tax-efficient investments are done.
Productive investments are those that can:
- Clock an optimal rate of return;
- Cost of investing is low;
- Counters inflation;
- Are tax-efficient;
- Cater to your investment objectives; and
- Aid in accomplishing envisioned financial goals
When you invest, remember to diversify.
Putting all eggs in one basket can prove risky. Diversification is one of the basic tenets of investing that helps to reduce the risk to your investment portfolio.
Diversification should be:
- Across asset classes (i.e. equity, debt, gold, real estate); since all asset classes do not move in one direction;
- Across investment avenues within each asset class (for example in debt, you need fixed deposits and debt mutual funds);
- Across issuer of securities (for example in mutual fund, you need schemes from various fund houses);
- Across time horizon (i.e. have portfolios for short-term goals, medium-term goals, and long-term goals); and
- Across countries
When you diversify, take care to ensure that money is deployed in accordance to the best-suited Asset Allocation based on your:
- Income & Expenses;
- Assets & Liabilities;
- Risk profile (aggressive, moderate, conservative); and
- Investment Time Horizon
Like diversification, asset allocation is an investment strategy too, defining a roadmap. It refers to investing a certain percentage of your investible surplus in asset classes, such as equity, debt, gold, and real estate, respectively. This ensures
your portfolio maintains the balance between the risk and return of any particular asset class.
If you are conservative or risk-averse, a predominant portion of the investible surplus should be parked in debt/fixed income instruments. If you are moderate risk-taker, some portion (around 60-65%) in risky assets (viz. equity, gold, real estate),
and rest (35-40%) in debt/fixed income instruments. On the other hand, if you have the stomach for very high risk, you can aggressively tilt the investment portfolio to equities to include stocks and equity mutual funds.
Besides, always make it a point to keep money in a savings account to take care of short-term needs and contingencies.
Remember, wise investing involves a long-term prudent, diligence, and a process-driven approach. Wise investing is unlike ad-hoc investing, where you park money without planning simply going by what your friends, family says, or the news (khabar)
in the market.
Keep in mind, it’s not about timing the market, but time in the market. One cannot always get the market timing right. Do not get swayed by the exuberance and time the market to make quick gains. Chances of landing on the wrong foot are likely
to be higher. Instead, you ought to have a strategy in place when fundamentals change.
Investing is serious business and requires the utmost discipline. While all of us aspire to become wealthy, just remember: Rome wasn't built in a day.
To create something blissful takes time and prudence; because wealth creation is a journey.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.