The basic definition of investing is to ‘put money in…’ financial securities or other assets. While this sounds simple enough, there are many details that one should look out for before making that investment.
However, if you are new to investing and not sure whose advice to follow or what information is important then there is one simple ‘tip’ for you. Just following this ‘tip’ will take care of a large part of the execution towards creating long term wealth.
If you do just one thing, then you must do this: start small and remain invested. Today’s investment processes allow you to begin with very small amounts whether you want to go for individual securities or managed funds. The option of managed funds means that you needn’t take the load for picking these individual securities and rather you can entrust your hard-earned money to a professional portfolio manager.
Thanks to a feature known as systematic investment plan (SIP), you can now begin your investment account with as little as Rs 500 a month (after an initial investment of Rs 5000). There are advantages to starting small. Firstly, you get to experience the journey of how returns get generated and accumulated before committing larger amounts.
Secondly, it also means you can start investing early in your life given that the amount itself is not a huge ask. Thirdly, it means you can be regular; a small amount is easy to maintain even during times of financial hardship. Lastly, if you combine starting early, being regular and remaining invested, you stand to benefit from the power of long-term compounding.
For example, a Rs 500 SIP in an equity-oriented fund every month for 20 years can compound to a value of Rs 5 lakh at the end of the period; make that Rs 5000 every month and it can build up to Rs 50 lakh and Rs 10,000 can become Rs 1 crore. This is assuming an annualised return of 12%.
What’s most important is to start and stay put.
Today’s investment processes allow you to begin with very small amounts whether you want to go for individual securities or managed funds.
Remaining invested does not mean you endorse bad choices. Whether you invest directly in securities or in managed funds, if you do so without adequate research or the help of a good advisor, you are likely to make mistakes. The wrong choice can cause damage to your return expectation. Remaining invested in an underperforming fund or security for long periods can, hence, be detrimental to your return objective.
You have to review your investment choice periodically and if what you have chosen is a category underperformer for a prolonged period then you must switch. However, switch to another fund or security in the same asset class to maintain your wealth creation objective.
Perhaps the only tip you need to follow in investing is to keep it simple!