5 minutesMarch 16, 2018
Many people save enough for their future; and even confuse savings for investments. But let us educate you: In reality, these two facets of wealth creation are different.
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Simply putting money aside, under the mattress or in a box after you've covered your expenses and obligations is not productive. In times when inflation is eating away at your hard-earned money, you need to step up and invest ––– more importantly, invest wisely!
Because ultimately you want money to work for you to achieve future financial goals; is it not?
That said, saving is the first step to investing. Therefore, it is imperative to manage your personal finances carefully so that your investable profits can increase. This is what you need to do:
- Create a monthly budget and see how you can best reduce expenses.
- Avoid buying unwanted items. When you go shopping, you have a list and...take advantage of discounts/cashback offers/reward points.
- Economical where possible; don't go shopping to avoid pinching your pocket.
- Avoid creating a mountain of debt, borrow beyond your means.
- Start saving at an early age. This way, the power of composition can work in your favor. You can start small to begin with, but save regularly and make sure you consciously try to increase investable profits.
Then the investable profit must be invested. By definition, investing is setting aside your money for productive use, with the expectation of earning returns greater than inflation, in order to preserve the purchasing power of money. It is a process that puts your “saved money” to work for you.
Investing brings the following benefits:
- Helps create wealth by earning returns (interest and/or capital gains) on your investments.
- Helps you achieve long-term financial goals ie. buying your dream house, your dream car, your children's education, their marriage, your retirement; among many others.
- Combats inflation
- Provides financial security
- Gives you financial freedom
But take a cautious approach when investing. Consider your age, financial health/circ*mstances, risk profile, investment goals, financial objectives, investment horizon, investment costs, tax implications and other aspects.
Additionally, when choosing investment options, do enough research to have the winners in your portfolio. Most importantly, these should be consistent with the aspects to achieve the intended financial/investment goals.
Also make it a point to start saving and investing early in your life (aPPF-account; because an early bird gets a bigger worm, supported by a broader time horizon, better curing wealth. Let's understand this better with an example:
| Information | Mohan | Sanjay | Ajay |
|---|---|---|---|
| Current age (years) | 25 | 30 | 35 |
| Retirement age (years) | 60 | 60 | 60 |
| Investment period (years) | 35 | 30 | 25 |
| Monthly Investment (Rs) | 10.000 | 10.000 | 10.000 |
| Return per year | 12% | 12% | 12% |
| Accumulated Sum (Rs) | 64.309.595 | 34.949.641 | 18.788.466 |
(Table above is for illustrative purposes only)
Mohan, Sanjay and Ajay, three friends, had one goal in common:retirement plans. All three wanted to retire at the age of sixty.
Mohan, the smartest of the three, started planning and investing at the age of 25, investing Rs 10,000 per month. Sanjay realized the importance of retirement planning when he was 30, while Ajay realized it much later, when he was 35.
With the benefit of a broader investment horizon, Mohan's investments can increase wealth much higher - about 15 times (up to Rs 6.43 crore); while Sanjay and Ajay's money grew nine times (to Rs 3.43 crore) and six times (Rs 1.88 crore) respectively, as shown in the table above.
Therefore, remember that it is never too early to save and invest. In fact, your wealth generation can improve if productive, tax-efficient investments are made.
Productive investments are investments that:
- See an optimal return;
- The investment costs are low;
- Combats inflation;
- Are fiscally efficient;
- Get to know your investment goals; And
- Help to achieve expected financial goals
When investing, remember to diversify.
Putting all your eggs in one basket can be risky. Diversification is one of the basic principles of investing and helps reduce the risk of your investment portfolio.
Diversification should be:
- Across all asset classes (i.e. equities, debt, gold, real estate); as not all asset classes move in one direction;
- Through all investment options within each asset class (for example, for debt you need fixed deposits and debt mutual funds);
- For all issuers of securities (e.ginvestment associationyou must use schemes from different fund houses);
- Over the entire time horizon (i.e. having portfolios for short-term goals, medium-term goals and long-term goals); And
- Across nations
When diversifying, make sure the money is invested in accordance with the most appropriate asset allocation based on your:
- Them;
- Income & expenses;
- Active in passive;
- Risk profile (aggressive, moderate, conservative); And
- Time horizon of investments
Like diversification, asset allocation is also an investment strategy that defines a roadmap. It refers to investing a certain percentage of your investable profits in asset classes such as equities, debt, gold and real estate respectively. This ensures that your portfolio maintains the balance between the risk and return of a particular asset class.
If you are conservative or risk averse, a large portion of investable profits should be invested in debt/fixed income instruments. If you take moderate risks: some (about 60-65%) in risky assets (i.e. equities, gold, real estate) and the rest (35-40%) in debt/fixed income instruments. On the other hand, if you are willing to take very high risks, you can aggressively tilt the investment portfolio towards equities and include stocks and mutual funds.
Also, always make it a point to keep money in onesavings accountto meet short-term needs and contingencies.
To conclude…
Remember that smart investing involves prudence, diligence and a process-driven approach in the long term. Sensible investing is different from ad hoc investing, where you park money without planning, just going by what your friends, family say or the news (khabar) in the market.
Remember, it's not about timing the market, it's about timing the market. You cannot always determine market timing correctly. Don't be tempted by exuberance and time the market for quick profits. The chances of landing on the wrong foot are probably higher. Instead, you need to have a strategy in place when fundamental conditions change.
Investing is serious business and requires the utmost discipline. While we all aspire to be rich, remember: Rome wasn't built in a day.
Creating something blissful takes time and care; because creating wealth is a journey.
Good investment!
Disclaimer: This article is for informational purposes only. The views expressed in this article are personal and do not necessarily represent the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author are not responsible for any direct/indirect loss or liability incurred by the reader in making financial decisions based on the content and information. Consult your financial advisor before making any financial decision Investments in mutual funds are subject to market risk. Please read all fund-related documents carefully. Axis Bank Ltd acts as an AMFI registered MF distributor (ARN code: ARN-0019). The purchase of mutual funds by Axis Bank customers is purely voluntary and not linked to the use of any other facilities of the bank. *Terms and conditions apply
