10 commandments of investing
// November 27th, 2009 // General
INVESTING today is not just about opening a bank fixed deposit or a public provident fund. With the opening up of the market in all ways, with everything being a function of the market, be it jobs, credit, interest rates, inflation, it’s no longer enough to remain in the safe comforts of a bank deposit or government scheme. There are more than 500 financial products to meet your every need and create wealth; the challenge is the pick the right ones. Moneycontrol lays down the ‘10 commandments of investing’ which will help you make that choice.
Commandment 1: You need a goal
To create wealth you need to know why you desire wealth in the first place. Your goal could be:
- Saving up to make the down payment for a home mortgage
- Buying a car
- Saving up for the higher education of children
- Your retirement
Whatever the goal is, once you figure it out there will be a target for you to achieve.
After this, it is as simple as saving your bonus or surplus towards the goal.
Commandment 2: Invest regularly
You need to religiously save money. Set aside a specific amount every month from your salary. If you think you’d not feel compelled to save, you can invest your money in recurring deposits, Systematic Investment Plans (SIP), Monthly Investment Plans (MIP), etc. Here, you have no choice but to write a cheque every month. You can, of course, pick an amount that suits your salary level and your goal.
Commandment 3: Account for inflation
The value of money is actually depreciating with time. Strange as it sounds, it is true. If the rate of inflation is more than the rate of return, the real value of your investment is negative. For example, if you have invested Rs 10,000 in a bank fixed deposit for a period of 3 years at an interest rate of 5.5 per cent, you will be assured of a maturity amount of Rs 11,742. Suppose during this period of 3 years, average inflation was at 6 per cent, the real value of your maturity amount would be Rs 9,859.
Commandment 4: Evaluate your risk profile
You will have different capacity for risk depending on your income and your needs. There is also a different risk tolerance, based on an individual’s psychological make-up. Understand your risk profile and plan your portfolio accordingly.
Commandment 5: Save for emergencies
You can’t have all your money locked-up for the long-term. Remember to set aside some liquid cash to meet emergencies. Be prudent, plan for the worst-case scenarios. This way you are adequately prepared for the bad times. You can do that by keeping funds equivalent to 4-6 months of their monthly household budget in cash and bank savings account. Banks will give little by way of interest, but they offer highest liquidity. You can withdraw this money at any time.
Commandment 6: Buy insurance early
Investing is not only about putting money in financial products. It is also about protecting that money so that you don’t have to make unnecessary withdrawals. Insurance, life and health, can guard against that. The cost of your insurance is linked to your age. That is, the older you grow the higher your premiums. Once you cross 50 years of age, you will also be asked to go for several medical tests that add to your cost. So, be smart and go for an insurance policy at an early age.
Commandment 7: Plan your taxes, but don’t make it the be all
Make the best of your tax saving investments like Public Provident Fund, National Savings Certificate and the like. While it is true that tax saving instruments must not be your only investments, make sure that you don’t end up paying taxes when you could have actually saved them by making fruitful investments. Even investing in a pension policy or an insurance policy can save you tax, but make sure you don’t do that just to save on tax.
Commandment 8: Equities for the long term, debt for the short term
Long-term investing helps you tide over short-term market volatilities, especially in high risk-high return asset classes like equity, something that short-term players invariably lose sleep over. Long-term investing will also keep you from making common mistakes such as timing the market, picking bad stocks, speculating on stocks that are worthless, investing on borrowed money, trying to make a killing in some fad-of-the-day stock, etc.
Commandment 9: Asset alloaction
Devise a professionally counselled and well-managed asset allocation portfolio. That way you can reduce your risk without necessarily having to reduce your returns. To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g. within equity shares your exposure should be to companies in different sectors; or within fixed income investments it could be partly government risk and partly corporate risk.
Commandment 10: Seek professional help
If you don’t have what it takes to analyse stocks or research mutual funds, seek professional help. If your health seeks a doctor, your money should seek a professional advisor.
via moneycontrol.com