A little discipline and some fiscal prudence can go a long way in creating wealth. Aruna Rathod gives you simple tips on how to invest your savings wisely and build your own portfolio over the years.
Each one of us is careful with our money. The first instinct is to save once we start earning. Saving is usually done to meet expenses like one’s marriage, or for the future like children’s education and wedding expenses, to buy a vehicle or real estate. Sometimes, savings are kept aside for an indulgence. “These are short-term, goal-oriented savings. Each one of us has a unique approach to save and multiply money. One should also have a long-term approach to savings and investment, so that you build a sizeable portfolio over the years and enjoy the fruits of your labour,”advises Mumbai-based Anantram Rao, a chartered accountant and financial adviser.
The first step before you make any investment decision is to figure out your finances. Sit down and consolidate your financial situation. Make a financial plan. Do you want to retire at 50?
Do you want to have enough money to take care of your parents in their old age? Each one has different needs for money, and there are different ways to meet your financial goals.
“The first step of the plan is figure out a goal. Do you have the aptitude to take risk? Do you have enough knowledge to invest in the right avenue? Take your time to learn every small detail about every investment opportunity before signing up,” advises Rao.
Take advice from a financial professional and if you are not happy with one, gather information from multiple sources till you are absolutely sure about an investment opportunity.
Understanding the difference between savings and investment
Putting away cash or keeping aside some funds in a bank account is the plain vanilla approach
to savings. Your money is easily accessible to you and depending on the kind of account you choose, you even get a rate of interest on your savings — usually around 5 per cent per annum, that more or less keeps up with the inflation rate.
To understand investment, you need to know that there are two ways to make money: You can either own the money (and the asset) or loan the money. You can be an owner when you own something– real estate, stocks, gold coins–assets that are traditionally known to increase in value over the years. You can loan money to companies by buying bonds, giving loans to individuals and getting a return on your investment.
Understand your risk-taking aptitude
When you “invest”, it is opting for an avenue to grow the money at a rate higher than the bank savings account. The higher the returns, the higher the risk. “Where investments in fixed deposits, bonds and debt funds give relatively low returns, they are also relatively risk-free. On the other hand, investing directly in equities can give you handsome returns, but there is also the risk of wiping out your entire corpus,” advises financial consultant Shalini Sharma, adding that a middle-path approach can be to opt for mutual funds through a Systematic Investment Plan (SIP) which allows you to get the benefit of equity, with the expertise of fund managers who invest in the right equities. “But one should bear in mind that even mutual funds are no guarantee of good returns. After all, they are also subject to market movements,” says Sharma, adding that if one does not want to take risks, one should stick with fixed income options like bank FDs or postal savings schemes.
Consider short-term Goal-oriented investments
Then, there is an individual approach to savings. For instance, Ritika Joshi, 42, wanted to buy a car for herself. She kept aside 20 per cent of her salary to collect the money for the down payment for her car. Once she bought the car, the money that she would keep aside as down payment became the EMI of the car. So she didn’t feel the pinch of buying a car. Tip: Keep aside money in easily accessible bank accounts for short-term goals. Don’t invest the short-term money in stocks as the investment could drop in value just at the moment you need it.
5 tips to make your money grow wisely
Understand where to invest: On a small scale you can grow your money by investing in Public Provident Fund (PPF) as it gives a rate of interest of 8.5 per cent per annum. In case you are working and a part of your income is going towards EPF (Employee Provident Fund), you can request your employers to increase your contribution to the EPF as it will result in higher savings.
The secret to make your money grow is to either put a lot of money to work or let it work for a long period of time. Ideally, you should do both.
Learn to invest when you are young: Start with your first salary. A big part of making money grow is to take advantage of time. At a young age when you are in your early 20s you can invest in stocks too. When you are young, it’s an advantage as it gives you time to recover from setbacks, if any. The longer you wait to invest, the more growth you miss. Time is the ingredient that allows your money to multiply, due to the long-term benefits of compounding interest.
Understand your investments: Do not buy or invest in anything that you cannot understand or explain. You can fall for grandiose plans of your Rs 1 lakh doubling in six months, but ‘how?’ is the question. No money doubles just like that. Understand that you may lose the entire amount if you are greedy. You will come across plenty of schemes that talk about 20 per cent growth per annum. Anyone who promises more than 10 per cent of returns per annum needs to be investigated. Risk is ever-present when investing your money.
Spread your portfolio: Do not put all your funds in equities, or within equities, do not invest in only one company. The thumb-rule is that no company should constitute more than 40 per cent of your portfolio. Ideally, your equity investments should be around 50 per cent, with the rest divided between gold, debt and FDs. This is not counting the real estate investment, or your EMIs on the housing loan. As you grow older, the exposure to equities should reduce and reliance on fixed income instruments should increase.
Investing also means controlling expenses: Cut back on unnecessary expenses. Work out
a budget with compulsory allocation for savings before any other expense.