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Golden rules for successful investing

August 05, 2017 08:08 IST

Golden rules for successful investing

Investing is an art of implementing scientific process with discipline, says Anil Chopra, Group Director, Bajaj Capital.

Illustration: Uttam Ghosh/

Investing is an art as well as a science but above all it is a process.

Often saving is confused with investing and many uninformed and unaware individuals stop at savings and never take the next step of investing and keep wondering why their wealth has not grown in real terms.

If you park all your funds in saving instruments like savings bank account, bank fixed deposits, post office schemes like post office monthly income scheme, Kisan Vikas Patra, National Savings Certificates and Provident funds like EPF, PPF and GPF, then you have only saved some amounts and you have not invested it and hence do not expect any growth in your wealth for fulfilling your future goals like education of children, their marriage or comfortable retirement, etc.

There is no investment devoid of risk.

However, taking calculated risk with strong discipline of following some time-tested strategies can actually help you grow and create wealth over a long period in a sustained manner.

Let's understand few golden principles of successful investing.

1. You have to allocate your savings to various asset classes like debt, equity, gold and real estate etc. If you just confine to one of these then either you are taking too much risk or you are being overtly conservative.

2. Golden thumb rule of asset allocation is that 100 minus your age should be invested in equity, 10 per cent in gold and balance in debt instruments like EPF, PPF, bonds, debt mutual funds and bank FDs etc.

For example, if your current age is 50 years, you should be investing 50 per cent of your funds in equity, 10 per cent in gold and balance 40 per cent in debt.

3. While choosing appropriate debt instruments, give preference to EPF/PPF over Post Office Schemes/bank fixed deposits as the interest on former is tax free. Also, open-ended debt funds offer anytime liquidity and superior tax efficient returns and should be preferred over bank fixed deposits/saving account balances.

4. Do not keep high balances in your bank savings accounts as interest rate is very low and even that is also taxable. The thumb rule is to keep a maximum of two months of your monthly household expenses budget in your bank savings account.

5. Investing in equity is considered risky but if certain strategies are followed with discipline, decent amount of wealth can be created over a medium to long period.

There is a bigger risk of not participating in the growth of the economy if you decide to stay way from investing in equity.

6. For investing in equity, always choose reputed mutual fund equity schemes instead of resorting to investing in shares through stock market.

7. While investing in equity mutual fund schemes always prefer SIP (Systematic Investment Plan) as compared to lump sum investment.

8. If you have lump sum amount to invest in equity mutual funds, you should opt for STP i.e. Systematic Transfer Plan.

9. Best time to invest in equity market is when you have funds and you have long time horizon of at least seven years or above. Do not invest because it appears that the stock market index is at a lower level.

Trying to time the market is a futile exercise.

10. Start investing as early as possible and preferably immediately after first salary of your life. But please remember it is never too late to start. Even if you are 50 years of age and have never invested in equity before, you may start with SIP of suitably affordable amount for your long term goals like retirement or children marriage etc.

11. Never ever borrow and invest. Always invest your own savings.

12. Best time to exit is when your goal has arrived and when you need the funds and not at a time when market appears to be at a high index.

13. Always keep your spouse involved in all investment related decisions and be totally transparent about various investments.

14. Always consult an expert like a Certified Financial Planner or an authorised mutual fund agent to begin your journey of successful investment.

Do not hide any fact from your investment adviser and share your goals, aspirations and details of current investments truthfully with him/ her.

15. It is highly recommended that you ask your investment adviser/financial planner to create a document for you known as financial plan or investment plan which can be referred at regular intervals for ensuring that you are on track.

16. You must review your portfolio at least four times every year by fixing personal meetings with your investment adviser. This is important as your portfolio may be required to be re-balanced in case of certain events in the economy.

17. You must start your initial investments with large cap equity funds and then diversify into mid cap/small cap/flexi cap and then into thematic schemes like contra or infrastructure or banking, pharma, etc.

18. Please ensure that at least 40 to 50 per cent of your equity portfolio is always in large cap equity fund schemes.

19. Avoid investing in real estate unless your financial portfolio is in excess of Rs 2 crore and you still have surplus funds for investment.

20. Your exposure to real estate investment should never exceed 40 per cent of your total net worth.

For example, if your total wealth is around Rs 5 crore then at least Rs 3 crore should be in financial portfolio and balance can be invested in suitable real estate projects.

21. With every passing year, your exposure to equity must go down and your exposure to debt should continue to grow.

22. Please remember that while evaluating investment options, do not look at the absolute returns rather you should calculate the real rate of return which is computed after reducing inflation as well tax.

For example, if you fall in 30 per cent tax bracket then 8 per cent tax free bonds is a better option for you than 10 per cent taxable bonds or bank deposit.

Anil Chopra