Time is of highest essence in investing & the earlier you start the more you earn on investment
BATMAN does not need life insurance. He certainly needs a wealth manager though. Bruce Wayne (Batman during the day) has no family dependants and therefore does not require life insurance. However, he has an industrial empire generating a large amount of wealth which needs to be preserved, grown and managed efficiently. Homer Simpson, on the other hand, absolutely needs life insurance. He is a family man with dependants and therefore needs to protect his family from any unforeseen events.
We are all unique—just like everybody else! Who we are and what our life situation is or what we expect it to be has a large bearing on how we manage our money. It is therefore very important that we have the right approach to managing our wealth and choosing the right wealth manager in advising us on an appropriate portfolio because there is after all a world of difference between Batman and Homer Simpson.
An investor has to understand a few aspects that are common to everybody no matter how different one is. Following are some of the basics that you should dwell upon:
Saving v/s investment:
Saving and investment are often used interchangeably. However, your savings are not necessarily your investments. Funds set aside for future use can be termed as savings. Therefore, cash set aside or left lying in a savings account giving a nominal return is savings. Investments, on the other hand, refer to funds that are put to use with a purpose of earning a return on them and are often made with a specific purpose.
Risk v/s return:
The most common characteristics that a novice investor wants in an investment product is that it should have no risk and very high return. Seasoned investors, however, are aware that returns on an investment product is commensurate with the risk taken by the investor. Higher the risk taken, higher is the probability of return.
Know thyself:
It is very important to know yourself before venturing out to invest. Assessing your risk appetite, time horizon and return expectation is very important before you start investing. A risk profiler is a document available with most wealth managers and answering the questions contained therein will help you identify the kind of investor you are and consequently the amount of risk you can take.
Start early:
The power of compounding is stupendous. Time is of the highest essence in investing and the earlier you start the more you earn on an investment. It is a good idea to start investing early in life for goals that seem distant. A good example is retirement planning. For instance, an amount of 10 lakh invested at the age of 40 in a product giving a 10% return per annum would grow to just above Rs 57 lakh at the age of 60. However, the same amount invested at the age of 28 would grow to more than Rs 2 crore by the age of 60.
Your portfolio:
Once you have identified your goals, it is important to have an investment portfolio that corresponds to your risk appetite, return expectation and time horizon. Asset allocation is a key aspect of diversification which ensures that you get the best optimized return for the amount of risk taken. This is possible by combining asset classes in such a way that the combined portfolio carries a reduced amount of risk while enhancing returns.
The market:
Financial markets differ in nature, depending upon the asset classes and geographies involved. The Indian equity market, for instance, is not without its share of volatility and uncertainty. Though equities as an asset class has given higher return over the long term, investments in equities are subject to large gyrations in the short term. It is wise therefore to expose yourself to equity only with a resolute understanding of this short term volatility and with a faith in the ability of this asset class to deliver superior returns over a long period of time.
Mutual funds:
They are investment pools managed by professionals based on pre-determined objectives. They are excellent vehicles for investment and accord many benefits to the investor. The benefits include professional management, diversification, convenience and tax savings. There are many types of mutual funds spread among the various asset classes varying in risk and return. An investor is best advised to be informed and educated about Mfs or better still, seek professional help while investing in MFs. Investors also have to understand that point-to-point returns should not be the basis of selecting a fund. There has to be a qualitative aspect to selection to augment quantitative methods to give the investor a holistic picture.
Save tax:
An effective way of saving tax is by investing in securities that are eligible for a tax deduction U/S 80C of the I-T Act 1961. Equity Linked Savings Schemes (ELSS) are among the many options available for saving tax. ELSS schemes have a lock-in that is generally for three years and are quite effective in generating returns as the lock-in period ensures a long-term investment period.
