Like anything good in life, investments also require time and patience to grow and fructify. We are going to discuss some guidelines for long term investors. Please find below some pointers which will help you to grow your investments in the best possible way.
1. Start investing early in life and follow this habit until your retirement. It is said that we should start investing as soon as we earn our first income. Starting with investments early in life helps us manifold, because of the concept of the Power of Compounding. It also helps us to imbibe the quality of discipline. Just to understand the benefit of the Power of Compounding, let us look at the following example: If you invest Rs. 5,000/- per month for a period of 40 years your investment amount will be Rs. 24,00,000/- and maturity amount will grow to Rs. 5,94,12,101/- @ 12% Compounded Annual Growth Rate. Whereas If you invest Rs. 5,000/- per month for a period of 30 years your investment amount will be Rs. 18,00,000/- and maturity amount will grow to Rs. 1,76,49,569/- @ 12% Compounded Annual Growth Rate. Thus a delay of ten years in starting your SIP will cost you about 4,25,00,000/-.when you retire.
2. Invest through SIPs. Investing through SIPs is better than investing lumpsum into stocks and mutual funds. This is because we benefit from Rupee Cost Averaging. Rupee Cost Averaging means that when the price of stocks is high your investments buy less units of the stocks and when the price is low your investments buy more units of the stocks. Thus the cost of acquiring the units of stocks gets averaged. Also while withdrawing money from the funds it is a good practice to withdraw using Systematic Withdrawal Plan. A Systematic Withdrawal Plan is the exact opposite of a Systematic Investment Plan. With an SWP you can withdraw a fixed amount everymonth and benefit from Rupee Cost Averaging even during redemption.
3. Time in the market is more important than timing the market. This is a very popular phrase used in the stock market. It is very difficult to gauge when the stock price will hit the bottom or the top, even for established Experts. Hence it is always a good practice to invest when you have the funds and hold on to your investments until their is a fundamental change in the attribute of the stock, which requires you to dispose it off. This strategy is also called the Buy and Hold strategy.
4. Diversify your portfolio. There is a very famous phrase ” Don’t put all your eggs in one basket”, which applies perfectly to investments in stocks. It is widely accepted that a collection of atleast fifteen to twenty stocks should be there in your portfolio for effective diversification. If you don’t have the capital to invest in such a large bunch of stocks, it is better to route your investments through a mutual fund.
5. Don’t get swayed away in any direction by public or general opinion. Don’t buy a particular stock because everyone else is buying it and don’t sell a particular stock because everyone else is selling it. Do complete research before buying or selling a stock and if you don’t have the time or resources required to do the research, then hire a financial advisor. Also don’t get swayed in by greed or fear and don’t look at your stock’s prices on a daily or weekly basis.
If you follow the above guidelines for long term investors, I can assure you that you won’t regret having invested in Stocks and Mutual Funds.
Mungekar Wealth 