2016 is over! It was a year of unexpected (br)exits, shocking trumps and confusing demonetisation. Even in the stock market the most seasoned pundits were left scratching their heads trying to figure out what was going on. After a long time commodities and metals, ruled the roost. Looking at year in hindsight makes me wonder, if making good returns from Investments is a myth. But the secret is not in where you invest, but how and when you invest. For a bit of trivia, there is a well-researched statistic that even though US Stock market’s historical average market return has been 8.5%, the average investor only earns a maximum of about 5%. In the Indian context, though there is no formal data of how much an average investor earns, but the number will be a lot less than 16% which is the compounded return of the BSE Sensex since inception. This statistic begs the question that what can investors do to benefit more from the market and get more from their investments. Over a decade of experience in the investment realm have helped me provide you the 5 Best Ways to Earn More from your Investments.
1. Early Bird Gets the Worm
As bodes for other things in life, investing early in life is extremely critical to get more in the long run. This is how you get more from your investments by being an early bird.
The first and the most talked about benefit of investing early in life is taking advantage of the power of compounding. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn`t… pays it.” To put the power of compounding in simple terms is that it helps you earn interest on your interest for a sustained period of time. For example, let us take two circumstances below.
|Situation one||Situation Two|
|Amount Invested||500 per month||500 per month|
|Stayed invested till age of||60||60|
|Rate of Interest||15%||15%|
As it reflects from the table, biggest difference is that just by investing 5 years in advance you will reap returns which are close to double than what you will earn when you invest 5 years later. So, invest early and see the snowballing effect of compounding on your investments.
2. Take Risk, Reap More
The older you get your responsibilities get larger and decisions get safer. Investing early in life allows you to take a little more risk because even if something goes wrong you have time to recover. Investment tools which are more volatile, like equities, tend to yield high returns in the long run. The reason for this is simple that in the short term these securities may be a bit insecure, but in the long run the volatility is normalised and you reap higher returns.
The best way to get more from your investments is to invest in the long term and nullify the market troughs and take benefit of the crests as and when it comes.
3. Be Smart. Go Direct.
Asset Management company (AMC) charges management fees to the investor, also known as the expense ratio. Expense ratio covers everything from fund management fees, operational and marketing expenses to commissions paid out to distributors. This expense ratio ranges anything from 1.5 to 2.5% (for equity schemes) every year depending on the fund house. Out of this percentage a sizable chunk goes into paying commissions to distributors like banks and agents (almost 1 to 1.5%). You cannot avoid the other expenses, but you sure can avoid paying the commissions.
Since 2013, SEBI has introduced the option to avoid the commission part altogether by investing directly with the AMC rather than the mediators like distributors and banks. This option is called the Direct plans of mutual funds. On average, commissions eat up to 1.5% of your returns every year. Even though it seems small, thanks to power of compounding this 1.5% snowballs into a huge amount in the long term. Invest in the direct plans of mutual funds and maximise returns of your investment.
4. Don’t be afraid of commitment
“Time is the friend of the wonderful company, the enemy of the mediocre.” – Warren Buffet An age-old investment tip but relevant for everyone is to invest for long term. Why I chose to include this in the top 5 is that despite knowing this fact we react emotionally to the market. Only a handful of investors earn equal to the full potential of the market. At the cost of sounding rhetorical, I would say “Time in the market is more important than timing the market”.
Yes, probably in the short term returns may wobble, but in the long term the market always reverts to the fruitful average. I strongly recommend that do not listen to speculation and do not rush to sell on every small correction in markets. Invest in the economical, lucrative and durable stocks or funds and you will always get more from your investment in the long run. Go long, Get More.
5. Equity in Diversity
As the age old adage goes, “Don’t put all your eggs in one basket.” Expand your investments over all avenues across a depth of industry sectors and assets like real estate, commodities, stocks, bonds, and cash. Although diversifying your investments does not ensure superior returns by itself but it does make sure that failure of any specific investment tool does not lower the return of your portfolio. It allows you to reduce your investment risk, by dropping losses and surrendering minor portion of profits. So, diversify and ensure that you get the most out of your investments in total.
To summarise we can ensure that we get more from our money by investing early in life, assuming calculated risk, committing for long term, eliminating the middle man and diversifying our investment across different asset classes.