POST BY AMIT KUMAR
“Do not go where the path may lead, go instead where there is no path and leave a trail.”
– Ralph Waldo Emerson
Any investment decision should be akin to taking a decision when running a business. And much like an entrepreneur, one should start one’s investment journey on a sound foundation. The list below gives the necessary framework to kick-start your investment journey
Rule #1: For a successful investment, beat inflation
‘Money saved is money earned’ is just a myth. In today’s world, money only has value if it earns over and above inflation. For a majority of investors, the ideal way is to assess future expenses by projecting inflation over a longer period and according to the nature of the spend; for instance – education inflation at 8-10%, household expenses at 5-6% and so on. This way the risk of being under-invested is mitigated to an extent.
Rule #2: Invest in products with higher returns than a fixed deposit
A majority of investors that I meet restrict their investments in capital markets to equities and invest in fixed deposit when it comes to debt. What is interesting to note is that the inflation and tax adjusted return from a fixed deposit barely matches the inflation rate. You can read more about this in my article that highlights the returns from a Fixed Deposit over a 35 year period.
As an investor, you have to remember that debt as a category has multiple options which give better tax-adjusted return. For instance, for the last 35 years, Gold has delivered a return of 8.52% in absolute terms, while Fixed Deposit has delivered a return of 8.91% and Equities (BSE Sensex) has delivered 15.56%. While the average inflation during this period was 7.79%. So net of tax, a Fixed Deposit gives return in the range of 5-7% depending upon the tax bracket.
Rule #3: Never mix your investments with insurance, keep them separate
An investment product along with insurance is a deadly cocktail which most of the investors fail to notice till it’s too late. Traditionally insurance products are packaged the way most Bollywood movies are packaged, that is as a combination of a bit of everything, ‘a bit’ being the operative phrase. The return on such plans is not more than 5-7% and at times they don’t even provide sufficient cover. And for these reasons, it is best to consider pure term insurance to safeguard yourself and your family against risks and keep your investments separate.
Rule #4: Follow goal-based investing
More often than not, I meet investors who arbitrarily invest a certain amount in a Systematic Investment Plan and consider it sufficient to take a term cover based on the current financial condition. What they completely disregard are their future liabilities and expenses, while there is no risk bigger than being under-insured. After all the onus of protecting one’s family goes beyond one’s lifetime.
The ideal approach is to follow our five steps to financial success wherein we help you assess your goals, calculate your net worth, then check the gap between the two and implement a suitable plan and regularly review it. You can also read about the approach here.
Rule #5: Be a disciplined investor
One of the simplest yet not often appreciated aspect of investing is the discipline required towards achieving one’s’ goals. Quite often the biggest enemy of an investor is the investor himself. Saving, investing and growing your wealth requires you to have a disciplined approach and stay the course as there are often too many distractions and much short-term noise along the way. It is when you stick it out for the term of the investment that you enjoy the benefits of the power of compounding.
One word of advice as a parting note – superior internet speeds and user-friendly transaction technologies have ushered in a new era of investments via ‘click and transact’. However, this could be a bane as the tendency to keep logging in to check your portfolio and make changes is very high. Ideally, you should use such technology platforms for their ease and convenience but ensure you don’t act out of impulse against your investment goals.