The earlier you start, the better off you are. The advantages of starting early have been discussed in an earlier article last week. ( See “importance of starting early” Dt. 19th March 2012)
Starting your investments when you have substantial outstanding loans to pay
We tend to hold on to home loans, educational loans etc. because of the tax rebates they offer, but the high interest charged on these more nullify the effect of these rebates . It is advisable to keep part paying your loans whenever you have any surplus money. I have also come across people who regularly invest their income surplus, yet never pay their credit card dues in full and always have a revolving credit.
Thinking “Short Term”
Most people are reluctant to lock-in their savings for a long term and prefer lesser yielding short term investment avenues where they have the flexibility of withdrawing their capital at will.
Stagger your investments- money which you are likely to require in the near future should go in short term fixed income or debt schemes. The rest of it which you probably do not require for the next 3-5 years or more should be invested in riskier avenues where the longer term mitigates the risk and enhances the returns.
Playing it too safe
Many of us are risk averse and are happy keeping all our money invested in Fixed Income and Govt. bonds where we are reassured that our principal is safe , even though the rate of return is not very attractive. The consequence- after accounting for the high inflation and income taxes, the real rate of return is actually close to NIL or even negative!!
Depending upon what your age is, take exposure to the stock markets-either directly or through the mutual fund route. The lesser your age, higher the exposure should be, since you have the time to face all the market fluctuations and get rewarded over the long term.
Not investing anywhere
There is a small segment of people who are happy letting their surpluses lying in savings or linked fixed deposits and do not believe in complicating their life by first investing and then tracking their investments. After all, why take unnecessary risks when the returns are not even guaranteed??
A piece of advice for them…
Yes, there is no guarantee that the investments will do as well as expected. But one thing is guaranteed. If you choose to do NOTHING, you are not going to achieve your financial goals for sure!
” The early bird catches the worm”.
All of us would have heard this famous proverb.When it comes to our personal investments,it cannot be more relevant.Let us see with an example, how important it is to start saving early.
Ram and Shyam are childhood friends aged 25.They have just finished their studies and started working.
Ram is conservative,thoughtful and meticulous by nature.On being advised by a professional financial planner,he starts investing Rs 1000 per month in a recommended Systematic Investment Plan.
Shyam too is keen on saving,but he decides to enjoy his new found financial independence for now and like most of us tend to do,decides to postpone his savings plans for sometime, till he settles down in his job and gets some financial stability.
At age 35 , he is impressed with the steady growth in Ram’s portfolio and starts investing Rs 2000/- per month (to make up for the lost time) in the same plan.
Let us see where both of them are at age 55.
Ram has saved Rs 1000/- per month for 30 years.Total amount invested is Rs 3.6 Lakhs
Shyam starts 10 years later, and has invested Rs 2000/- for 20 years.Total amount invested is Rs 4.8 Lakhs.
Assuming a conservative growth rate of 8 % p.a , this is how they have fared:
Ram : Current Investment Value : Rs 15.03 Lakhs
Shyam : Current Investment Value : Rs 11.84 Lakhs
Even after starting with the double the amount per month and investing 33 % more over time, Shyam’s investments are still 27 % lesser in value !! This is the power of compounding,which Ram benefited from due to an early start.
Conclusion : Remember the three mantras of investing :