Why do we earn money? To fulfil our financial dreams. Investing, when done right, can lead to the most effective utilisation of our money in order to fulfil those financial dreams. However, when done wrong, it could also mean an erosion of hard earned money and possibly lifelong and irrational scars or fear from such a useful mechanism.
There are many people out there, who refuse to invest money, having burnt their fingers earlier by doing it wrong. To ensure you don’t make the same mistakes, remember the below commandments of investing to do it right:
Thou shall look at it for the long term
Investing is not a get rich quick scheme. Even when someone thinks of buying and selling stocks within a day, it is called “trading” and not investing. Equity, in particular, comes with certain inherent risks which often leads to short term volatility. However, when you stay invested over a longer term, those risks almost certainly get ironed out and your money would have worked hard. Investing in mutual funds should be done for a minimum of three to five years to show adequate results
Thou shall not check the value of your investment every other day
While economic theories are built with the assumption that humans are rational creatures, multiple researches show that humans are far more emotional with their decision making. This is even more so when it comes to making decisions in the financial or the money sphere. When you check the value of your investment every other day, your emotions rise and fall with the prices. Looking at the short term erosion of your principal, your emotions could order you to stop losing money even when your head is trying to reason that you should invest more money to bring down your purchase price.
Thou shall do homework to understand the basics
Most of us depend on investing to grow our money in a way that helps us fulfil our financial dreams. This makes investing play an important role in the scheme of things. For anything this important, it’s important to understand the basics of how it functions. Ensure you do your homework to understand the main terminology, type of mutual funds, how they work and the risk involved. While you will understand more of it as you go further on your journey, reading up on the basics before you start will set the ball rolling.
Thou shall automate where possible
We all lead busy lives and it is easy to miss out on devoting the time to manually initiate tasks for investing at regular intervals. You may think that doing it all manually gives you more control, but automating such transactions are bound to make the probability of you investing much higher. Automation helps you stay on the track and disciplined with the habit of investing despite much lesser time that you spend on it. It’s the perfect start and forget it mechanism for investing. This is the reason why SIPs have gained such popularity among retail investors today.
Thou shall undertake periodic review of the portfolio
Investing theory states that you should have a clear asset allocation in place. What percentage of your portfolio would you want to invest in the high quality blue chip mutual funds? What percentage to the risky small cap mutual funds? Are you setting aside a portion for the opposite moving, lower risk lower return category of debt funds? Once you have an asset allocation in place, you should conduct a review periodically. One should try and maintain the asset allocation (debt-equity composition) of the portfolio sans the market movements. Which will mean periodically reviewing all holdings – trimming and increasing exposures to debt or equity holdings, as appropriate. This exercise of rebalancing has to be done keeping in view tax and exit implications of all schemes.
Thou shall look at cost before investing
A famous economics quote goes by – there is no free lunch in this world. Investing also comes at a cost. Most people do not know that every mutual fund has an expense ratio built into it and the quoted returns are after deducting it. There are two components to the mutual fund expense ratio – one is the fund management expenses and second are the broker distribution costs.
The fund management expenses consist of all the varied costs of research, making the trades, managing the huge corpus of money as well as marketing of the fund. The second cost though is the one paid to brokers and is easily avoidable today. Check any website and you will see that you can look at mutual funds in the regular or the direct scheme. The direct scheme has only the fund management costs built in whereas the regular scheme show lower returns as it comes with the higher cost including distribution. Over a long term, these distribution costs eat into your returns substantially.
At one time, paying the brokerage cost gave the convenience of seeing your investments in one place. Today, it is easy to invest in direct schemes through providers like Moneyfront and still have the benefit of great user interface and seeing it all at one place.
With these core habits and discipline in place, you are all set to make the right decisions and taste success in thy investment journey.