Salil Dhawan explains how as you progress in your career you can also grow your money at a phenomenal pace if you start investing early.
Illustration: Uttam Ghosh/Rediff.com
Aspirational young Indians are working hard to make it big out there. Their hard work in the professional field must be complemented by correct saving and investing habits.
But is this possible at all?
The simple trick is to start saving and investing early and correctly in life.
We believe investors should learn from mistakes made by others rather than committing one themselves and then introspecting. They should not experiment on their own.
A significant amount of money and investment years (in the 25 to 35 year age bracket) are lost in this experimentation process.
A good percentage of investors have hefty premium paying ULIPs and random equity investments to their credit by this time.
If there is already a proven methodology such as systematic investment plan (SIP), then why try to re-invent the wheel?
Money is scarce and you should make sure that as you grow in your professional life, your money also grows at a phenomenal pace with time by investing systematically and following proven processes.
1. Don't just save, but invest too
Many young investors now are very good at saving a portion of their salary for the future. Having said that, saving alone will not do the trick.
Keeping money stacked up at 4 per cent in your bank account won't make you wealthy.
You have to invest your savings into appropriate financial instruments in proportion to grow your money.
Do remember, investing in financial instruments which don't grow for the long term is also a way of destroying wealth.
Investing in expensive ULIPs and shunning equity altogether (not investing in equity linked savings scheme) in your 20s can be an opportunity lost.
Control the urge to invest randomly in direct equities based on advice from various quarters.
Many investors, in their mid 20s stop their equity investments completely midway due to losses they incur by randomly investing in stocks.
Investors should control such an urge till they get a hang of equity markets, the volatility associated with it, basics of investing, how to identify long term compounding stories.
Equity mutual fund is an excellent financial instrument to start investing in equity markets.
2. Don't be too defensive in the early years
Getting guaranteed returns is the best case scenario but if you are young and looking to grow your wealth, shying away from equities and stacking up all your money in a bank account or FDs will not make you rich.
In fact, it will barely give you positive inflation adjusted returns.
In the early years, you can dedicate a good percentage of your savings to equity for your long term goals as equities tend to give much better returns over a long term.
Decide on adequate equity-debt proportion based on your risk profile and start investing.
So start a SIP without any delay as part of equity allocation.
It is always fruitful to have an adequate proportion of equity and debt in your financial portfolio but you can't shun equities altogether. Have it as part of your investment portfolio.
I have come across many investors who save close to Rs 80,000 per month but are investing only Rs 2,000 via SIP for their long term goals.
You need to understand that to achieve all your goals, you need to increase SIP amount as a specific percentage of your savings every year.
3. Starting your SIPs as soon as you start earning
Starting early is the success mantra, however small that amount may be.
You can start a SIP in equity mutual fund with as low as Rs 500 per month. This is the biggest favour you can do yourself.
SIPs is a must have in your financial portfolio of any individual, irrespective of the age but it holds much more significance for a young investor.
If a young investor is able to understand the power of compounding and as to why initiating SIP in equity mutual funds early can make a big difference to the end corpus, that's about it.
Let's talk about some numbers.
If you start investing Rs 5,000 per month at the age of 25 till your retirement age of 60, you will accumulate Rs 7.4 crore, assuming a return of 15 per cent annual returns.
If you start investing the same amount at the age of 30, then till retirement age of 60, assuming 15 per cent annual returns, your corpus will be Rs 3.5 crore.
I think you can very well appreciate the huge difference and act accordingly.
Most of the times, it's not that we can't spare a specific amount (not necessarily Rs 5,000 per month); it's just lack of awareness on the part of investor which costs them dearly. So in case a young investor or any investor is reading this article and have not yet started investing in mutual funds, please initiate one tomorrow first thing.
It's your responsibility to make sure that your money works for you; just like you work hard at your work place for your salary at the end of each month.
A high proportion of investors who I have met in the field, realise this big mistake only between the age bracket of 35 to 40 years losing precious 10 years of aggressive investing in the process.
If you are in your 20s, make sure you don't repeat the same mistake.
Invest via SIP from the very beginning of your professional life.
4. Don't introduce too many funds in your portfolio from the word go
Do adequate research before choosing the right funds and have conviction in the mutual funds you choose.
A large proportion of investors introduce too many funds when they start investing even if relative SIP amount is pretty less, to begin with.
For instance, if you start investing with initial SIP amount of Rs 5,000, then even investment in two funds, Rs 2,500 each, should be good enough.
Choose funds depending on your risk profile and keep investing.
Going forward as you increase your SIP amount, you can introduce few more funds in your portfolio.
5 to 6 funds should ideally make up a good mutual fund portfolio.
In addition, don't choose sector/thematic funds initially if you are a first-time investor in mutual funds.
5. Don't stay away from equity markets just because someone incurred heavy losses in the past
Many investors often take cues from someone in the family or friend who has had a bad experience with equity investing at some point in time.
Investors do take such a loss as a general phenomenon and decide to stay away from equity markets.
It's always good to learn from the experience of investors who have been in the market at some point in time but assuming losses in equity markets is the norm will be incorrect.
Markets are supreme and always reward investors who have virtues such as patience and consistency in investing regularly in quality businesses for a long time.
Always be positive and think about growing your wealth.
Kind courtesy: investment-mantra.co.in
- PART 2: 5 more money lessons for you