Nine key investment lessons to take away from Navratri
1. Plan expenses and debt
It is crucial to set a budget. Budgeting gives you control over what to spend and save. Setting a budget is the first step towards achieving financial goals. Begin by summing up your total expenses and then subtracting that from your total income. This will put a leash on your spending and allow you to think twice before you reach for your wallet.
2. Invest regularly
Let’s understand this with an example. There are two friends: Aveer and Aryan. Aryan started investing Rs 1 lakh in equity mutual funds when the Sensex was around the level of 48,000 in February 2020. Aveer started investing through a systematic investment plan (SIP) at Rs 10,000 per month in equity mutual funds in February 2020. After 10 months of investing, in December 2020, the Sensex was around 48,000 again, after taking a dip to fall below 26,000 in March due to the Coronavirus lockdown. Aveer could earn an absolute return of more than 25% on his investment while Aryan could only earn a return of around 7%. Why? This was because of the benefit of rupee cost averaging. Basically, rupee cost averaging means that when a sum is invested at regular intervals, the average cost of purchase comes down as you buy units at different times and every time the market is at a different level. The example mentioned above highlights the importance of investing regularly without worrying about the market levels.
3. Review regularly
One should cultivate a habit of tracking the performance of investments regularly. This will help to keep a check if the investments are in alignment with your financial goals. It might happen that over time, a particular asset class may have more weight in your portfolio than what your risk appetite is at that time.
4. Take advice from a financial advisor
One should not make impulsive investment decisions based on hearsay. Investment decisions are crucial. If not taken in the right way, they might hurt your financial goals. Investment decisions should not be based on rumors but on facts and investment research. Certified and experienced investment advisors can be your guide on the investment journey.
5. Save for the future
Saving begins by spending less on things that are not needed. From pricey coffee to new designs in clothes at retail prices, one can find ways to cut back on spending. Once you start saving, do not leave money lying idle. Start investing based on your requirement. Invest in equity funds if you don’t need that money for a long period. If you need the money within a short span of time, consider debt mutual funds.
6. Bet on long term
It is always a good idea to stay invested for the long term to create wealth. Time in the market is always more rewarding. When you are invested in the market for more than 10 years, the benefit of the power of compounding gives great rewards. Also, long-term investing helps avoid the ups and downs of the market. This is a smart way of achieving your long-term financial goals.
7. Diversify your portfolio
It is very important to diversify your portfolio as it is a tool to reduce risk. Diversification means investing across various asset classes having different levels of risk. How much to diversify is defined by your Return on Investment (RoI) expectation. Diversification is a good strategy but over-diversification can lead to lower returns. So, be wary of over-diversification, which means adding too many financial products to your portfolio.
8. Balance the risks first
Taking risk according to your risk appetite is one of the first things you should look at while investing. If you take a higher risk than you are comfortable with, you might face an increase in your losses; and if you take a lower risk than your risk appetite, you might be losing out on investment returns. Consider rebalancing your portfolio at regular intervals so that it can stay aligned with market movements. It is imperative to maintain your risk-reward ratio.
9. Book profits timely
An investor should know the right time to book profits and when to exit an investment. It is also important to set stop losses on your equity investments as all your stocks might not perform well. Setting a stop loss can help you to avoid big losses.
The author is Co-founder, Tarrakki
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.