Basic Rules for Successful Investing
Set Your Goals
To become a disciplined investor, you have to adhere to some simple yet rational rules. As we approach the start of yet another financial year, it’s a good idea to recap rules that can help you with effective investing.
This may sound boring and even outdated, but it remains the most critical aspect of long-term investing. No matter what age you are at, goals are the key. Goals will help you answer the crucial question, why do you want your money to grow? The answer could be an ostentatious one—to upgrade to a richer lifestyle—or a functional need—owning a house—or a simple one—to educate your children. Whatever the desire, only when there is a goal to look forward to can you efficiently invest money to cater to it.
You needn’t allocate different products to different goals but doing an appropriate asset allocation is key. If most of your goals are far in the future, a higher allocation to growth assets like equity will be more useful.
If, on the other hand, you don’t want to risk uncertainty because you need assured payouts, you will have to build a mix of fixed income and equity assets. Say, you aren’t comfortable using only equity because interim volatility makes you nervous. In such a case, pick a mix of debt and equity for these goals. But ultimately, for long-term goals, the most efficient way is to have some amount of growth assets like equity.
Starting a one-year systematic investment plan, investing in Public Provident Fund for just a few years, or even starting a recurring deposit for just one year and then discontinuing it will not help you grow wealth. Incremental investments need to be made regularly—every week, month, or quarter; you choose.
If you allocate your money to an investment at a pre-decided frequency, you are less likely to spend the money.
Second, to grow wealth, money needs to be added bit by bit. Of course, it’s good to invest a lump sum when you receive it, but there may not be many such opportunities.
Growth assets such as equity are also market-linked and in the near term, prices can move up or down. Therefore, investing regularly will protect you from this volatility.
Two years ago, a 3-year fixed deposit with State Bank of India would have earned 9.25% per annum for you. Only investing in fixed deposits and renewing them on maturity won’t be wise at today’s rates of around 7.5%. This doesn’t mean you have to invest in equity or other risky products; rather you need to be aware of similar products that can increase your effective yield.
For regular income, fixed income mutual funds (both open-ended and fixed maturity plans), tax-free bonds, and corporate non-convertible debentures are some options that you may consider.
While looking at products, a common mistake is to let taxation dictate which asset or product you choose to diversify into.
Do check if your choice of investment, assets, and products fit the goals you have in mind. While your asset choices and product choices can change from time to time, the basics of why you are investing shouldn’t waiver. These will get defined by your goals and your ability to follow through the investment plan as closely as possible