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Sunday, December 4, 2016

Tips for Small Investors

Sidestepping simple investing mistakes can significantly enhance your portfolio returns.
Investors, unknowingly, act in ways that harm their in terests. Much of it has to do with behaviour. If these small but significant behavioural aspects are kept in check or improved upon, it will benefit their investment portfolio to a great extent in the long run.

Accumulating a lump sum:

Waiting to accumulate `50,000 over 10 months, instead of starting with `5,000 straightaway, is neither right nor an efficient investing strategy. Not right because it is likely that the amount will be spent on an impulse purchase, and not efficient because while you accumulate, the money earns a meagre 4% savings account interest. The mantra to be followed is: invest as you earn. If you draw a steady paycheque on a monthly basis, invest monthly.

Saving instead of investing:

Savings instruments, such as fixed deposits, offer safe and predictable returns, desirable to fulfil short-term goals. Taxable interest income and returns that may not beat inflation, however, are their downside. For longterm goals, such as children's education and a retirement corpus, investing in equity-oriented instruments is necessary. The returns are tax-efficient and likely to beat inflation.

No goal or time horizon:

When encashing investments, it matters less that the tenure of your SIP has completed. What really matters is whether you need the money to meet a desired goal. If it is not so, then even if the SIP tenure is over, you can stay invested and your investment will continue to earn scheme returns.

No incremental increase:

As income rises, one needs to increase investments too. This will ensure that the intended corpus keeps pace with inflation as well the increase in one's standard of living.

Going by past performance:

It is common for investors to confuse past performance of equity markets with future returns.Thus, when the going is good and valuations are probably above average, investor may commit higher amounts to markets than what their risk profile permits. On the other hand, when the past performance is bad and, valuations are cheaper, investors may keep away from markets. Both the scenarios are far from ideal. A rewarding strategy is to follow an asset-allocation-based approach and do a periodic portfolio re-balancing.

Not accounting for the power of compounding:

Investing is a rewarding experience for the patient investor.`5,000 invested monthly, at 12%, will amount to `63,413 in a year. This is just a 6% appreciation on a capital of `60,000.This appreciation will rise to 36% over five years--`3 lakh appreciates to `4.08 lakh. The appreciation shoots up to 92% over 10 years, and `6 lakh will fetch `11.5 lakh. One has to be mindful that `5,000 is invested on a monthly basis.

To successfully accumulate large amounts, in order to meet important financial goals in life, planning in advance, an early start and staying the course are a must.

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