Invest Every Month to Fulfil Your Goals

A couple of hours ago, I was watching pictures of Aditya who was enjoying with his family in Europe. I was just recalling how he shared this wish with me just 2 years back. He wanted to take his family for a nice vacation when he would have a sufficiently fat paycheck to afford the same. Being his financial guide, I had advised him to not wait for a fatter pay check but instead do regular savings and invest every month to build a corpus to make this dream come true. I was quite surprised when he told that in his 3 years of job, he had almost nil savings apart from the compulsory PF contributions.

Given the fact that the trip would have cost him around Rs. 3 lakhs, I made some quick calculations and asked him to invest Rs. 10,000 per month in a good equity fund for 2 years. While a lumpsum Rs. 3 lakhs figure feels like a daunting task, investing Rs. 10,000 every month seemed much easier to him. Luckily, equity investments have been doing well which made him reach his goal 3 months earlier.

As they say, little drops of water make a mighty ocean, such small investments do go a long way to build a healthy corpus for better financial health. However, to make the most of the regular investments, one should take care of the following:

1. Investing According to the Goals – The decision for investments intended to be made should be based upon your goals, both short term and long term. Short term goals can be paying for your child’s annual college fees, getting your child married, going for a vacation abroad etc. Long term goals can be buying a house, buying a luxury car etc. Since the returns of various investment choices like fixed deposits, shares, gold etc. vary as per the invested period, it becomes imperative for you to understand and acknowledge the need to choose the investments wisely. So, for regular investments towards short term goals, shares and equity being highly volatile over shorter tenure should be avoided.

2. Investing as Per Risk Appetite – Your investment strategy should take care of your risk appetite as well. If the thought of losing your principal investment makes your heart beat faster, equity investments may not be the right option for you as equity investments do not guarantee returns like fixed deposits offered by banks etc. However, for a reasonably conservative investor, one can choose blue chip stocks which involve investments into companies with strong fundamentals, financials and management.

Accordingly, here is my little checklist for you for your regular monthly investments:

1. Check your Tax Deductible Investments – As per present tax laws, a deduction of Rs. 2,00,000 can be availed of in the Gross Total Income towards various eligible tax saving investments. So, before allocating the investible surplus, do consider utilising this Rs. 2 lakh limit in full. Such investments can be in equity mutual funds (with 3 year lock-in), fixed deposits (with 5 year lock in), PPF (with 15 years lock in from the first investment) etc. I tend to complete my tax investments in equity mutual funds. This helps you fetch higher returns since a tax saver equity mutual fund with 12% annual returns effectively gives you 27% annualised return on the funds invested (net of the tax benefits).
2. Shorter the Goal, Shorter the Risk – When you have a near term goal and when you need to conserve your capital as priority, invest the funds into debt like bank deposits, AAA-rated company deposits, bonds etc.
3. Reap the Benefits of Compounding for Long Term Goals – It is always a good strategy to reinvest the returns from the investments in order to reap the benefits of compounding. Compounding, in simple words, means interest on interest.

Putting it in figures, if you invest Rs. 10000 at 10% interest rate compounded annually in a bank FD for 2 years, the interest for first year at Rs. 100 will be added to the principal amount and the interest for the 2^nd year will be calculated on Rs. 1,100. Hence, the total interest earned in two years will be Rs. 210 and the effective interest shall be 10.50%. To see how compounding helps, check out the illustration below:

As illustrated above, the returns are much more in the 5 year period between 10-15 years than in the first 10 years. This is all due to the power of compounding.

4. Diversification – In older times, it was advised not to put all your eggs in one basket. The modern lazier times have coined a single word for it: diversification. It points to spreading investments over a variety of assets to reduce the overall portfolio investment risk. An ideal mix of equity-debt combination in the investment portfolio will depend upon your risk appetite. Also, do have a pinch of the yellow metal in the portfolio to diversify it further. Investment may be made in gold ideally not exceeding 10% of the total portfolio.

So, while investing strategy is a relative term and differs from person to person, there are some broad principles which guide the overall strategy. These will help you in achieving your goals and at the same time get more returns.

Do share your ideas and comments and don’t forget to share with us if these principles indeed help you anytime in future.

Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment. He blogs regularly at  www.simardeep.com.