The best thing about reaping good returns is to plan your investments in a systematic manner. Remember, nobody can time the market. If you have surplus to be invested into equities, the right way to invest is in a systematic manner. Since most small retail investors are salaried individuals, the best way to invest in equities is to invest it every month. Yes, in the same manner you contribute to your provident fund or to your recurring deposit. If you invest regularly in the equity market, you can average your investments to the ups and downs of the equity market.
It is said that women are the best management gurus. They religiously plan their tasks keeping in mind all relevant factors in a most appropriate manner. SIP helps them to design their long-term investment objectives and milestones such as career planning and marriage of their children, retirement planning etc without looking at the market conditions.
They even can plan their short-term investment objectives such as travel fund, festival spending, birthday celebrations, EMIs towards insurance premiums and loans etc. SIP enables them to de-stress provisions for mandated commitments.
Best Time To Start a SIP
The market has entered a consolidation phase. It’s the best time to start a SIP. The downside risk is some 15%. If you start a monthly SIP, you average the risk on the downside at say 10% max. The longer the market takes for consolidation, the better for a systematic investor.
We agree that equity will deliver higher returns compared to other investments but only in the long term. So don’t run around and invest a big chunk of your hard-earned savings in equities. An equity investment is ideally a long-term bet. In the short term, you might require money to meet contingencies. Selling part of your equity investments at that point in time can adversely affect your chances of higher returns, especially when the equity cycle is on a down trend. For instance, if you invested 100% of your investible surplus in Jan ‘08, the value of your investments would have eroded by 30% at least. If you need some cash now, selling in the current market would be horrendous. So asset allocation helps.
As far as equity allocation is concerned, the generally used thumb rule in percentage terms is 100 minus your age. If you are 30 years old, 70% of your investible surplus should ideally be in equity. You can relax this thumb rule depending on your risk profile. Most small retail investors have very little risk appetite and it does make sense to relax this thumb rule.
One important thing to note here is that investible surplus for equity investments is different from your savings. You could have savings of Rs 1 lakh in a year but your investible surplus is usually much lower than Rs 1 lakh.
Here is how your investible surplus should be ideally calculated. Your total annual savings minus your 2-4 months household expenses plus 15% of your savings set aside for contingency constitute your investible surplus for equity investments. For instance, if your annual savings are Rs 1 lakh and your monthly expenses are Rs 15,000, then your investible surplus would be Rs 40,000 only [Rs 100,000 – [(15,000 x 3 months) + 15,000)]].
If you are 30 years old, then ideally Rs 28,000 (70% of Rs 40,000 and not 70% of Rs 1 lakh) should be in invested in equities. The rest should be in other asset classes.
First and foremost, don’t get lured away by the short-term returns from equities. When you see that the equity market has almost halved your investments since the beginning of the year, don’t lose hope. Think of the times when the equity market has crashed and nearly zeroed investments. Remember, the Harshad Mehta episode or the 2000 technology boom and bust. No doubt, some companies during these booms and busts have not been able to survive and a few others have done a vanishing act but don’t worry. Remember, returns will come over a longer time frame. You cannot be lucky all the time to double your money every two years. A consolidation phase is the best time to get the maximum returns for your bucks.
Long Term Gain
Remember, equities will outperform all other investment classes in the long-term. Take any 10-year period and equity returns have always out-performed other investment classes. Invest your hard-earned savings and forget about it. Don’t try to copy the traders and speculators. Don’t bother about your investments everyday. Let your money grow over the years.
Investing Directly Or Indirectly
Equity investing, more often than not, is dynamic. Also, it requires a lot of dedication, time and hard work. It’s not meant for everyone, especially not for the salaried. It’s a full-time profession. Just ask yourself how much time you invest in buying a consumer durable. You visit so many shops, cross check so many models and take your own time before short listing on a single item of a single brand. It doesn’t matter if the consumer durable you are buying is for Rs 50,000 or Rs 5,000 – the process remains the same. Even then there are so many tales of small retail investors investing their hard earned savings in stocks recommended by some friend, relative or stockbroker. Don’t commit that same mistake again and again. Invest only after you have researched on the stock, in the same manner as buying a consumer durable. Most people do not have the resources to research.
Rightly, knowledge and understanding are the key shortcomings faced by many small retail investors. In such a scenario, never aim to invest directly into the equity market. Invest through equity-related products such as mutual funds (MFs). It makes more sense to hand over your hard-earned investible surplus in the hands of professionals. Consider this: if you are unwell, do you go to the doctor or do you treat yourself? Ditto for your investments. The professionals will charge you a small fee, but will definitely manage your money more prudently than you.
Whether you are investing directly or indirectly (small retail investors should prefer the latter), diversification is the key for better returns. Never have all your eggs in the same basket. See what happened when the tech boom and burst happened. If you were heavily invested in tech stocks, you would have made heavy losses. You never know which sector might perform better than other sectors in the long term. So, always diversify across the sectors. At any given point in time, at least some sector would be out performing.
Similar is the case while investing indirectly through MFs. There are so many sector funds such as the tech, infra, pharma among others. You can choose to invest in different sector funds but unless you have a high-risk appetite, do not invest your entire investible surplus in a single sector. Small retail investors, as a whole, have very little risk appetite so it’s best to diversify. Diversified mutual funds are probably your best bet.
Selling your investments
The last point, but one of the most significant elements for higher returns, is selling your investments. When should you sell your investments? Should you sell if you have achieved your targeted returns? For a small retail investor, the answer is a definite NO. Never touch your equity investments, unless a financial crisis hits on you and your other investments are not enough to support the financial calamity. Build on the equity corpus over the years and use it to fund your child’s education or marriage or buying a home. As the great legendary investor Warren Buffett says, “Our favourite holding period is forever”.