Behavioural finance can greatly influence the kind of investment decisions one makes. Though this article does not intend to go into why, we will discuss two such behaviours that harm investors and prohibit them from achieving their objective of investment.

Not starting early

Young professionals in new jobs do not tend to include investing in their scheme of things when it comes to utilising their income. They usually put off investing for a few years and worry about investment and savings only after their professional and familial responsibilities have increased. However, investments can work wonders due to the law of compounding.

For instance, suppose you started investing when you entered the job market at the age of 23, and were able to save Rs 5,000, which you invested in an asset that provided 10% annual returns. In the second case, let us assume you did not save anything in the beginning but started investing Rs 10,000 only at the age of 33. In the third case, let us assume you started investing at the age of 33 but with a monthly amount of Rs 15,000.

Your investment would have grown to Rs 37.96 lakh, Rs 20.48 lakh, and Rs 30.72 lakh, respectively.

Clearly, you have an edge when you start earlier. In the third case, even if you invest three times more, you are not able to create the same corpus as in the first case. In addition, when you start early, we have not considered the higher investment you could have made because of an increase in salary.

Being too conservative

Many investors invest in low-risk assets, which are safe and assure a fixed return. Since the returns are fixed, they are risk-free and investors can get pre-determined returns. However, the returns are usually low or average. Investors pay a huge price in terms of opportunity cost by investing in low-risk assets. Equally, this is not to say that one invests their entire surplus in risky assets.

The key to good investment is to allocate your money into various assets depending on your time horizon and risk appetite. For a young person of 30 years who is ready to take moderate risk, he or she can choose to invest in balanced fund or equity funds. Equity or balanced fund can give 10-15% over time. Low-risk investments such as PPF, fixed deposits or government schemes provide 7-9% returns. While the difference may not look significant, the future value of your investment can differ dramatically in the long run.

For example, if you invest R10,000 per month for 15 years at 7% interest rate, you would be able to build a corpus of Rs 31.69 lakh. The corpus would have grown to R37.84 lakh if you had invested the same R10,000 at 9% instead—a difference of over R6 lakh. If you increase the investment horizon to 20 years, the difference would be about R16 lakh.

While there is certainly no doubt that you can improve the investment returns by selecting the right asset and investing wisely, it is also true that the biggest reason for investors not having a healthy corpus is failing to invest when they can. Remember that, in your earlier years, your expenses are limited. Moreover, it is the right time to inculcate the habit of saving and investing. This will keep you financially independent and secure for times to come.

CASE STUDY
1) Investments can work wonders due to the law of compounding. Clearly, there is an edge when one starts at young age
2) Many investors invest in low-risk assets, which are safe and assure a fixed return
3) However, returns are usually low or average. Investors pay a huge price in way of opportunity cost by choosing low-risk assets
4) Key to good investment is to allocate money into various assets depending on time horizon and risk appetite

The writer is CEO, BankBazaar.com