Article | Sip - Aug 30, 2016 | 16:24 PM
From times unknown, we have been taught the virtue of savings. “Saving for a rainy day,” is the mantra that almost everyone knows. But then in a world, where we are spoilt for choices, where a modest inflation of 5-6% is a norm, can saving be enough?
While the virtues of saving is indeed quite valid, one cannot but overstate the benefit of investing. Investing into right assets and instruments can go a long way in achieving financial independence. Thus, in a way, savings and investments go hand-in-hand and are both necessary steps for creating a corpus.
But is there a right time/age for starting investments?
The honest answer is No, because, anytime and everytime is the right time to start. So, whether you are a 20- something starting your career or a 40-year-old realising you probably haven’t enough savings for retirement, investing your income is a no-brainer.
However, the sheer amount of options available in today's world can be overwhelming even for the financially savvy.
Before you take a dive and decide to invest in equities, bonds, mutual funds and the like, there are certain prerequisites you need to take care of before you make the plunge:
Set your goals
It is often said that before the action comes the idea. Just like a rudderless and aimless journey will rarely lead you to your destination, similarly not having a financial goal will not lead you to financial independence. Setting targets and priorities is the very first step on that road. What is it that you realistically want to achieve? Retire at 35, an international vacation every year, a second home, and so on.
Review your finances
Sit down and take a good honest look at your finances if you haven’t done that before. Note down all the expenses in a month and if you can meet them. Do you have any credit card debt, student loans, vehicle or housing loans? Figure out how much remains at the end of it.
Create an emergency fund
Life is bound to throw a few bouncers your way in the form of unexpected incidents which can cost you money. Set aside a small part of your income every month to deal with such expenses instead of prematurely withdrawing your investments.
Chart the risk appetite
This depends on a number of factors like age, income, expenses and liabilities. If you are in your 20’s or early 30s, you can look at some riskier investments like equity funds. The logic here is that even if it doesn't quite work out, you still have time on your side to make even. However, if you are on the other side of 30, you are bound to have expenses like education fees, medical expenses, saving up for retirement which would make you averse to risks. Usually, such people opt for safer investment opportunities.
Research and reflect on the options
Frankly, there is no substitute for research. And with a myriad of investment options, don't be surprised to find yourself dazed and confused. However, if you have followed the previous steps, you would have narrowed down your investment type. If you do not have a significant amount of money to invest, you can look at mutual funds for smaller investment. Look at the various mutual fund schemes available in the market and if they have a Systematic Investment Plan (SIP).
Though past performance is not an indication of the future trajectory of a scheme, it might offer a glimpse on how well it is managed. You will find the fund manager mentioned in the scheme related documents. See how they have managed their fund. Some funds are actively managed and some passively managed. Look at the diversity of the fund. Mutual funds have a mix of equity and debt investments.
As the adage goes about ‘Don’t put all your eggs in one basket’, diversify your investments. Don't put it all in one particular sector or fund. This will shield you from market volatility to a certain extent.
While we will be talking about how to time the markets in the subsequent articles, it is important to start now. After all, there is no good time to start a good thing.
Disclaimer: SIP does not assure a profit or guarantee protection against loss in a declining market. The illustration mentioned above is for illustrative purpose only and is not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and/or safeguard of capital. Information gathered and material used in the above illustration is believed to be from reliable sources. BSLAMC however does not warrant the accuracy, reasonableness and/or completeness of any such information. The illustration do not purport to represent the performance of any security or investments. Nothing contained herein shall amount to an offer, invitation, advertisement, promotion or sponsor of any product or services. In view of individual nature of consequences, each investor is advised to consult his/ her own Financial advisor before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Are mutual funds a reasonable investment in bull market?
Indian Mutual Funds have currentlyinvested about 1.35 crore (13.5 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes. (March 2017. Source: AMFI)
Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of March 2017 stood at ₹19.26 lakh crore. (Apr 2017. Source: AMFI)
Equity-oriented schemes account for around 32.8% of the industry's assets. (March 2017. Source: AMFI) Equity-oriented schemes derive 85% of their assets from individual investors. (March 2017. Source: AMFI)
HNI investors account for 20.98% of investments for a period of 12-24 months. (Source: AMFI)
Index funds usually have much lower operating expenses over actively managed funds.
This figure represents the fund's total asset base, net of fees and expenses.