Irrespective of good times or bad times, if you follow these basic rules with your money you are sure to reap rewards and a secure future!
1. Invest early!
The early bird gets the worm and the nectar in the flower too! There is no bigger mantra than starting to invest early. The difference in an investment of Rs.2000 a month made 7 years back and that of 5 years back, assuming a 10% rate of return is a whopping Rs.87,000 i.e almost 50% more in 2 years.
To give an example – Assume you are planning for your retirement which is 10 years away. If you put aside Rs.20,000 every month for at 10% return per annum, you can make more than double of what you accumulate in 10 years if you had only started this 5 years ago instead of now!
2. Know your risk profile!
Knowing your risk profile will help to determine which investments are best for you. Investing in equity no doubt carries risk but it is also true that equity is one of the better performing asset classes over the long term as long as the fundamentals of the economy are good. A look at the investment growth and returns in Indian markets over the past 3 decades is proof enough that a long term investment assures higher returns than a short term one.The key word is investor and not speculator. So, equity is definitely not a bad word and despite these times, SIPs/STPs should be continued and increased if possible.
Insure your expenses and your goals. The unforeseen is called precisely that because you can’t see the future. We would all like to lead smooth lives but what is actually around the corner is anybody’s guess. What we can do is prepare best to face unforeseen calamities so that those left behind don’t have to go through financial loss as well besides the emotional loss. Insurance is mainly an instrument used by consumers for hedging the future contingent risks related with life, health and non-life general issues. Keep aside funds for the right type of insurance that you need. And dont forget to invest in a Term Insurance policy as well.
4. Plan it !
He, who fails to plan, plans to fail. You plan a simple weekend holiday, you plan an evening out, you plan a movie with friends, you plan Diwali gifts for your friends and family. Then why don’t you plan you finances. Why doesn’t one set the goals in life and plan for them? Remember it is never too early to start planning for retirement and/or long term goals.
5. Diversify, diversify, diversify!
These times are the best example of how diversification of one’s portfolio with proper allocation of assets to different types of investments can reduce the risk to the portfolio. Look for asset classes with low or negative correlation to each other, such as gold and equities or art and real estate and depending on your goals allocate accordingly to these. All eggs in one basket never benefited anyone – so, diversify!
For InvestmentYogi by Lovaii Navlakhi, Chairman, International Money Matters