Key to Investing Wisely

Life is fast paced and demanding. Everyone wants to get rich quickly and live life king size! However, as we know, Rome was not built in a day. To become wealthy you need to be patient and disciplined in your financial habits and most importantly, invest wisely.

Investing is the process of putting money in various financial instruments in an endeavour to increase its value over time. And, in order to see the value of your investments grow, you must invest wisely. Investing wisely entails five essential aspects:

• Beginning with a clear financial plan

• Starting early

• Diversifying investments across various asset classes

• Keeping sight of inflation

• Investing with a long-term perspective

Let us take a closer look at how this works.

• Beginning with a clear financial plan

Investing without any goal is like eating without digesting. A good financial plan is therefore the key to your financial success. A good financial plan should take into account your current earnings, responsibilities and goals, both short-term and long-term. Most importantly, your financial plan should be chalked around your financial aspirations and risk appetite or appetite to bear losses. You must go ahead with your investments only when you have a clear financial roadmap.

• Starting early

When you begin to invest early, you can benefit from the advantage of compounding. Compounding is when the money you earn from investing is reinvested to maximize your gains. For compounding to work, two major things are necessary 'first reinvestment and the second is time'.

Let us understand this with an example - Reshma invests Rs. 10,000 at the rate of 6% in her first year of investing. Instead of taking out the Rs. 600 (Rs 10,000x1.06) that she earned in year one, she reinvests it in the same instrument. Assuming the rate of interest remains the same, she earns Rs. 11,236 (Rs10,600x1.06) by year two. Thus, just by staying invested, her money begins to compound and her wealth increases year after year. This is called the power of compounding.

• Diversifying investments across various asset classes

A key component of investing is the right asset allocation. You should never keep all your eggs in one basket no matter how attractive the returns might seem. When you invest across asset classes such as equity, debt, commodities and real estate, your risk no longer remains concentrated as different asset classes bear different degrees of risk and do not always move in the same direction.

• Keeping sight of inflation

If you do not invest your hard earned money wisely, your investments could actually decline instead of increasing in value. This is due to inflation or the rise in prices over a period of time that can erode the purchasing power of your money.

Let us see how this happens. Say, Ajay keeps Rs. 50,000 stashed away in a mattress for 15 years. If the average rate of inflation is assumed to be 5% per year, in 15 years the value of his money would have dropped to Rs. 23,160 instead of increasing in value.

Therefore, it is important that you do not make your money lie idle, but choose investments that beat inflation or at least keep pace with it.

• Investing with a long-term perspective

Investments should always be made with your long-term goals in mind such as buying a house, paying for your children's education, marriage and retirement. It is important not to get swayed by market highs & lows and stay on the path to achieve the long-term goals you have chalked out for yourself.

The best thing for you to do is to invest pre-determined amounts of money across various asset classes in inflation-adjusted instruments. Investments must be made in a disciplined manner over a period of time without being distracted from your long-term goals.

 

 

The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

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