You don’t have to be an investment guru to decide on your investment portfolio. Making a sound investment plan requires more than research and a few tips and tricks. Here are 5 ways to get better at investing.
1. Start Early
The earlier you start, the larger your corpus amount. When you start investing early, you learn the process of investing. Also, in your 20s, you are prepared to invest when you start making more money as you grow in your career. The case of starting early becomes more compelling when you do the numbers.
For instance, you invest Rs.1000 every month for the next 35 years with an expected annual return of 12%. The total corpus that you accumulate is Rs.65 lakhs. At the same time, the overall investment during 35 years is just Rs. 4.2 lakhs.
Similarly, you invest Rs.1000 monthly for the next 30 years with an expected annual return of 12%. The total corpus you accumulate is Rs.35 lakhs. While the overall investment is Rs. 3.6 lakhs.
You can see the difference in the corpus amount if you start five years late. Therefore, the earlier you start, the more significant the kitty amount because of the compounding benefit.
2. Financial Planning
Financial planning is a step-by-step process on how to meet your life goals with your money. A financial plan is not just about investing. It helps to examine your goals, helps you prioritise, save money and then invest to achieve your objectives after a defined period. Simply, it helps align your investments with your financial goals. Moreover, a financial plan will vary and depend on how financially secure you are.
For instance, if you just started earning and organising your money matters, your financial plan will be different from the one who has already accumulated wealth.
A good financial plan helps to manage your income better. In other words, it keeps a check on your expenses and helps you save more. It helps to choose investments that are in line with your time horizon, risk tolerance levels and your goals. Also, it takes care of your tax obligations at the beginning of the year. Furthermore, it considers unforeseen emergencies and medical expenses. It protects your dependents with adequate health insurance and life insurance. Moreover, it prepares you with an emergency fund. Therefore financial planning not only secures your financial future but also reduces mental and emotional stress.
3. Apply the 50-30-20 Rule
The 50-30-20 rule is a simple rule where you allocate your post-tax income into three components – 50% on needs, 30% on wants and 20% on savings. Needs are the basic necessities required for survival, including utilities, rent, groceries, EMIs, school fees, etc. In contrast, wants are unnecessary survival expenses and are considered luxuries of life. These expenses include entertainment expenses, dining out, gym, shopping, etc. Finally, savings helps to take care of your future. It helps to plan for emergencies and short-term and long-term goals.
Therefore, this rule becomes a starting point for managing your budget. It allows you to keep track of your expenses, enabling you to save more and take care of your unexpected expenses. It helps in building a better investment strategy. Moreover, you can also iterate this rule as per your suitability and increase your savings percentage gradually. Therefore, it allows you to control your expenses and consequently become more mindful of your spending habits.
4. Diversify Your Portfolio
A famous saying, “Don’t put all the eggs in one basket”, is often related to diversification. It simply means spreading your investments across multiple asset classes so that the performance is not much affected by sudden volatility in the market. It is essential to diversify your portfolio but do not overdo it. You need to choose an asset class or funds based on your needs, time horizon and risk tolerance level towards the asset class.
The significance of diversification is that it reduces overall risk due to market volatility. It helps to create a balance between risk and returns. For instance, you can choose to invest in high-risk investments for long-term and low-risk options for short-term goals. This way, your portfolio will not be sensitive to market volatility. Also, through diversification, goal-based financial planning helps to obtain better results. Furthermore, it is important to rebalance and shuffle your portfolio to capitalise on the market changes or when your goal is achieved. Therefore, diversification can be your friend when appropriately planned or else it can be an enemy when unclear.
5. Stay Invested
The money you invest in an investment instrument is your principal, and the excess you earn is the interest that gets compounded every year. The excess that you earn (interest) gets added back to your principal investment every year. Now the principal amount also consists of the excess amount. Therefore, this results in increased growth of your investment.
Compounding has the potential to show significant effects as the tenure of investment increases. Therefore, experts advise starting early and staying invested for the long term to enjoy the compounding benefit. Also, maintaining financial discipline is important. Investing regularly helps to work towards your financial goals. It will help to reap the maximum benefits in the long term.
As an investor, you have different options for investing. Also, you can make investing very easy. You can follow our tips “5 ways to get better at investing” in this article. The earlier you start investing and stay invested for the long term, the better it is to generate returns and create wealth. Chalking out your financial goals and aligning them with your investments through a diversified portfolio helps to have a clear understanding of your money matters. Also, this inculcates a disciplined habit of saving and investing regularly.
- Best Investment Plan to Invest in India
- Best Performing Mutual Funds in India
- Best Short Term Investment Plan in India
- Latest Nav for all Mutual funds
- How to Calculate Yield to Maturity
- Difference Between Financial Planning & Wealth Management