The most pronounced objective of investing is that our money should outlive us, not the other way round. Given our increasing average life expectancy, it is posing quite a challenge.
Also, with newer varieties of distractions and temptations available on a daily basis like watches, clothes, cars, electronic items, eating at expensive restaurants, exotic vacation spots, etc., it is getting increasingly difficult to strike the right balance between spending and investing. The distinction between necessity and luxury seems to be blurring.
In the light of all this, optimisation of financial resources is the need of the hour.
In a nutshell, the following are the most critical and worth remembering while investing
Money saved is money earned
On a conceptual level, most of us prefer living life king-size (the size of the king varying with our mental make-up and wallet size), blowing up money today as if there's going to be no tomorrow, especially in these three areas:
1. Shopping for excess clothes, watches, shoes, bags etc., which might eventually get used only a few times before we outgrow it or get bored with it
2. Investing in sub-optimal products: Earning 5-6 % of guaranteed returns is akin to high expenses
3. Exhibition: This would mean lavish weddings, buying houses bigger than one can afford, going on expensive vacations and eating in fancy restaurants on a frequent basis... In such cases, you might be spending to prove a point to others, rather than for your gratification.
Start investing early
Start investing as early as your first pay cheque. It inculcates a discipline; since most of us will work from the age of 25 to 60 (35 years) and would most likely be cutting our 95th birthday cake (Khuswant Singh survived till 99), the proportion of pre and post retirement years works out to 1:1.
What if circumstances won't allow you?
Work towards changing the circumstances. Spend less if possible, work smart at your job to get a better raise or look for another job with a better pay and job satisfaction too. It's about forming a good habit and hard-wiring the right attitude from the start. It's equally important to save or shall I say invest in the right product ideas. For youngsters who have just started earning, taking exposure to equities (investing in equity markets is one of the best ways to beat inflation, which is currently at around 10%) through Mutual Funds is a must since they may not have immediate goals.
What if all the excess money is going in rent?
Then over a period of time, one needs to reduce some expenses so as to generate some amount of surplus or increase earnings or look out for an accommodation with lower rent. I'm stressing on starting from day one, is because I believe, "well-begun is half-done" and we have to plant seeds for tomorrow from day one.
Should parents start investing right from their kids' birth?
Yes, so that they have enough time for the investments to grow to pay for their kids' play school fees, school fees, higher education expenses and marriage.
One needs to have both equity and fixed income in one's portfolio, which means both equity MFs and FDs/ fixed income mutual funds should form a part of it. Before you start allocating funds as per a targeted asset allocation, you must create a contingency fund. This would be keeping aside 4-5 months of expenses as reserves for any unforeseen circumstances. While the ideal mix needs to be customised to the individuals' goals, it's normally said that 100 minus one's age should be exposure to equity. SIPs are an excellent route to handle stock market volatilities. Gold as an investment idea could be 5-7% as an inflation counter. Life insurance amount should be enough at each and every point of time to fund the dependant's responsibilities in case of death of the earning member. Term insurance makes most sense owing to low costs. Medical insurance is a must for senior dependants.
Investing in property needs to be well-thought over because:
- Can be fairly illiquid at times, when you want to sell it
- One can't part sell a property
- In Mumbai it's tough to buy one without taking a loan and interest rates are close to 10.5%
- It depends whether one already has huge exposure to real estate
- Is the property being bought for self use or for investment reasons. Normally I nudge clients to buy one if they are staying on rent and hold them from buying their 4th or 5th one
Should you roll your investments; pull out your money and reinvest?
Make sure you regularly review the portfolio; 6 months to a year is a good enough time. Asset allocation should be watched out for. So if the targeted asset allocation is 70:30 for equity:debt, after every review, directionally move back to the targeted asset allocation by moving excess money from the bloated asset class to the under invested one. (may not be exact at all points of time, but largely there). You also need to be aware of tax implications.
Invest higher sums
To begin with at least 25-30 % of your monthly income should be set aside for investments. Invest before you spend, because unnecessary expenses automatically get curtailed this way. In most cases it has been seen that when it's done the other way round (spending before saving), no surplus is eventually left.
As your income increases, try to move from 25 to 35 to 40% of your income as savings. The idea is not to kill one's aspirations, wants or desires, but it should not be at the cost of one's tomorrow. To quote a Swedish proverb, “He who buys what he does not need, steals from himself.”
Invest to optimize returns (Excerpt from the book)
Returns and risk are two sides of the same coin and a balance needs to be struck between the two. The cost for better returns is risk. The returns generated from zero risk products after inflation and taxes will make you poorer and you would be better off spending the money. Remember, for short-term and medium-term needs, invest in asset classes with zero or low risk and ones which offer stable and predictable returns. For long-term, invest in asset classes like equities for longer periods of time (at least 5 years plus) and stagger your investments over 6 to 12 months.
Do not get perturbed by the roller coaster ride in terms of daily value which your equity investments could witness. Do not invest all your money in one asset class and do not invest money meant for short and medium-term usage in asset classes meant for long term investing.
Co-ordinated by Avril-Ann Braganza