The best investors in the world didn’t figure it all out in one day. Studying the financial marketplace, figuring out your personality, all this takes time and a lot of patience. We should not forget to mention the mistakes made along the way.
There are millions of articles and books written about how to become a successful investor, and the advice is often quite complex and tough to follow.
Here are some common-sense guidelines that will improve your investment success, no matter what your level of financial sophistication.
Start early and stay late!
Begin investing as soon as you can, be patient, and let time shower your investments with compounded growth. Let’s take an example.
Scenario I – You start saving Rs 750 per year from the time you are 15. After 15 years, you stop investing any money.
Scenario II – You start investing Rs 5,000 per year from when you are 30 and continue investing the amount till you are 60 years old.
If in both cases, let’s say, you earn 15% post-tax return per annum on your investments, in which scenario will you have more wealth when you retire at age 60? Don’t know? It’s Scenario I!
Want to know how? The Rs 750 that you saved every year between age 15 and 30 will amount to Rs 28 lakhs by the time you are 60 years old. However, in scenario II, the Rs 5,000 that you saved every year between age 30 and 60 will only come up to Rs 25 lakhs. The advantages of starting early are obvious!
Discipline = Better returns!
Be systematic. Each month, invest as much as you can afford and increase your monthly investments whenever you can. This is especially true for mutual funds.
When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on their market price. Therefore, with the money you invest each month, you can buy more units when the market moves down and fewer units when the market moves up. For example, if you invest Rs 1,000 a month in a mutual fund at a price of Rs 20 a unit, you will have bought 50 units (1,000/20). But at a price of Rs 10 per unit, you will have bought 100 units (1000/10). This means you are averaging out your cost.
You also get the benefits of compounding! Look at the table below. It shows the returns you will get when invest Rs 1,000 per month.
Return on investment (%)
Value of investment after 3 years (Rs.)
Value of investment after 5 years (Rs.)
Value of investment after 10 years (Rs.)
Value of investment after 15 years (Rs.)
Variety is the spice of investing!
Invest the money you`ll need in a few months in very liquid investments, but when investing for the long-term, invest as much in stocks and bonds as you can. Or invest in mutual funds. These are the ultimate investment products where diversification is inbuilt! As you build your portfolio, however, you may want to diversify further by selecting mutual funds that have different objectives or styles.
Each individual asset class has its own risk and returns characteristics, and behaves differently under various economic conditions and market cycles. It has been proven that the most effective way to manage risk is to diversify investments across a number of asset classes, thereby creating a portfolio with reduced risk and greater return potential.
The power of diversification is that as an investor you own a small chunk of many different investments, so if one fails, you still have the others. Don’t know which investment to choose? Read this post –EPF, PPF Or Mutual Funds, What Should You Go For?