Start investing early to maximise returns from compounding

By: | Updated: August 7, 2015 4:01 PM

When one starts a career, the first thought to strike him will not be financial planning or savings. But earlier one starts saving and investing...

InvestmentWhen one starts a career, the first thought to strike him will not be financial planning or savings. But earlier one starts saving and investing, the better will be the compounding benefits.

When one starts a career, the first thought to strike him will not be financial planning or savings. But earlier one starts saving and investing, the better will be the compounding benefits. Given the maze of investment options available today, an investor with limited knowledge will be bogged down. However, if investments are done systematically and in a planned way, the corpus will grow over the years.

It is most important to get basic correct. Most people begin their financial career with the sole aim of building wealth, without paying much heed to the basic investment principles.

Certain investment decisions like purchasing an online term insurance plan, health insurance, Public Provident Fund (PPF) or a National Pension Scheme (NPS) account will go a long way in building a risk cover and a long-term corpus. Once these basic investments are taken care of, one can look at avenues like equity mutual funds, stocks and real estate. Every investment decision must be linked to a goal. One must determine the current estimated cost for each goal and then inflate it to the approximate value as on the due date keeping in mind the inflation.

Invest emergency money in liquid funds

One must maintain a contingency fund worth at least six months of expenses to manage financials in times of crunch. Ideally, the contingency corpus should be invested in a liquid mutual fund which can give higher returns than bank fixed deposits and at the same time can be withdrawn any time. Asset management companies invest the corpus of liquid funds in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits. Lower maturity period of these underlying assets helps a fund manager to meet the redemption demand from investors at the earliest. Since there are no lock-in period in liquid funds, withdrawals are processed within a day and there are no exit loads.

Liquid funds have the lowest interest rate risk among debt funds as they primarily invest in fixed income securities with short maturity period. Fund houses have liquid funds with various options like growth plans, daily dividend plan, weekly dividend plans and monthly dividend plans.

Invest in SIP & RD

For regular investment, start an equity-oriented systematic investment plan (SIP). It enables you to invest a certain amount at a regular interval like monthly or quarterly and can help build wealth for the future. It works on the principle of rupee-cost averaging, which means your money will fetch more units when the markets are down and lesser when the markets are high. When the markets are volatile, it will allow you to achieve a lower average cost per unit. So, because of the rupee-cost averaging and the power of compounding, SIPs have the potential to deliver decent returns over a long investment horizon. While investors can discontinue the plan any time and even increase or decrease the amount, it is never advisable to discontinue an SIP investment.

For risk-averse investors, recurring deposits (RDs) are ideal. Both public and private sector banks and post offices offer RDs. One can start a bank RD for as little as Rs 100 a month and choose the tenure depending on his need. For banks, there is no outer limit on investment. India Post, too, offers a five-year RD where the minimum deposit is Rs 10 per month and, beyond that, any amount in multiples of Rs 5. There is no outer limit and the interest rate is 8.4% per annum. At banks, the interest rate on RD ranges from 7.5% to 8% per annum. The minimum period of investment is six months and the maximum is 120 months. Most banks offer loans against RDs and senior citizens get a higher interest rate, usually 50 basis points (bps) more.

Cost of saving:

* Certain investment decisions like purchasing an online term plan, health insurance, PPF or NPS account will go a long way in building a risk cover and a long-term corpus
* For risk-averse investors, recurring deposits are ideal. Both public and private banks and post offices offer RDs. One can start a bank RD for as little as R100 a month and choose the tenure as per his need

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