Invest regularly and choose right
There are many investors who invest money every month and
the amount ranges from a few hundred rupees to a few thousands. However, there are investors who wonder whether the amount invested every month would be enough to meet their future requirements. This feeling of self-doubt results in disrupting many serious investment programmes. Then, there are those who begin investing without analyzing how much they can keep aside for investments on a regular basis. As a result, they find it difficult to continue with their investment programme.
Although there are many factors that determine the optimal path for every investor, it is important to understand that an approach of investing every month to build capital over a period of time alone can contribute significantly to the success in the long term. However, it is equally important to focus on the right selection of instruments and monitoring the performance of the portfolio. Needless to say, one needs to invest in options that have the potential to provide positive real rate of returns i.e. rate of returns minus inflation, on a consistent basis.
For example, for investors who have a time horizon of five years or more, an option like a bank recurring deposit thay not an appropriate one as it does not provide adequate safeguards against inflation. For a long term investor, investing thru SIP in equity funds can be a better option. Equity as an asset class has the potential to out perform other asset classes over the long term. However, investors must know that an important factor in investing is called “risk versus return” ratio. The higher the rate of return, the higher the degree of risk. This risk, however, gets substantially reduced if one invests regularly over the long term.
MFs provide the best in terms of variety flexibility diversification, liquidity as well as tax benefits. Besides, through MFs, investors can gain access to investment opportunities that would otherwise be unavailable to them due to limited knowledge and resources. Another important point is that MFs themselves are accessible to investors of varying income levels. One can begin an investment programme with as little as Rs 50 or Rs 100 in certain cases.
Though mutual funds are a simple way to invest money making the right selection of funds and that too in the right proportion remains the key to success. Many long term investors often include balanced funds in their portfolios. Though, balanced funds can be effective in maintaining the asset allocation on an ongoing basis, one has to keep an eye on its proportion to the overall portfolio size.
Let us take an example of an investor who has a portfolio of Rs 3 lakh and decides to invest 25 per cent in a balanced fund i.e. Rs 75,000. Considering that a balanced fund would generally have an exposure of around 30 per cent in the debt instruments, only Rs 22,500 will be invested in debt instruments, i.e. around 7 per cent of the total portfolio. A portfolio like this neither provides proper diversification nor an opportunity to maximise the returns.
Another important point is to maintain realistic expectations as one weighs the risks and potential rewards while making investment decisions. All of us know about our own risk tolerance and comfort level with the ups and downs in the market and the same should be considered with complete honesty at the time of deciding the asset allocations i.e. how much should be invested in equity and debt.
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