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Meet a financial planner and the first prescription you get is to create an emergency fund. Depending on your job profile and your needs, you have to set aside expenses to cover three months to one year.
Limited income and a long list of financial goals make many turn away from the thought of getting into savings and investment mode. However, it should not be the case. Archimedes said, "Give me a lever long enough and a fulcrum on which to place it, and I shall move the world." When it comes to achieving your financial goals, regular investments (lever) over a long period of time (fulcrum) helps you achieve impossible sounding financial goals (moving the world).
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Here is how regular investments can ensure financial success:
Invest as you earn
Charm of any process lies in the ease of following that process. An average man on the street may frown at the idea of going to a place a km away, if he has to take 10 turns to reach that place. But show him a place 2 km away on a straight road and he is happy with it.
Most of us earn regular income by way of salary, pension and interest. Even self-employed individuals can visualise their cash flows in many cases. That makes investing on the go a natural process. Instead of making one large investment, it is less stressful to invest small amounts at regular intervals. “If you do anything regularly, it becomes a habit. It has been observed that investors, who complete 60 instalments of their SIP, are likely to continue investing over their life-time,” says Mohit Gang, co-Founder and CEO of Moneyfront.in, a mutual fund distribution platform.
Helps build an emergency fund
Meet a financial planner and the first prescription you get is to create an emergency fund. Depending on your job profile and your needs, you have to set aside expenses to cover three months to one year. The bad news is your monthly expenses also include expenses towards loan EMI and insurance premiums. That makes it a large sum for many.
If you have to build a corpus of Rs 3 lakh in emergency funds over the next three years, you may want to simply start a recurring fixed deposit of Rs 9,300 per month at 7 percent rate of interest.
Arrange down payment for home and other large purchases
Next in line comes large financial goals such as buying a home. Given home prices, the purchase needs to be funded with borrowed money, especially if you are keen to buy a home in a city like Mumbai. But no lender will fund the property if you do not have around 20 percent of the property value. This amount is called down payment. The bank is willing to fund the property only after you contribute to the same.
If you decide to buy a house five years from now, start a reverse EMI now. Either choose a short term bond fund or a recurring fixed deposit and start depositing money each month. Rs 15,000 invested per month for five years will return Rs 10.73 lakh at 7 percent rate of interest. “The magic of compounding works in your favour. And you end up building a desired corpus over a period of time without much stress,” says Gang.
Prepare for goals that are far away
In the case of millennials, retirement is a faraway situation. Many of them do not even have a fair idea of the lifestyle they would have when they retire. Even employed individuals in their 40s find it difficult to visualise their retirement. Run of the mill calculations using 6 percent rate of inflation, throw eye-popping numbers. For example, a household that spends Rs 50,000 per month will need Rs 1.6 lakh per month to enjoy the same lifestyle after 20 years.
As we move on in our life, our lifestyle also changes. Our needs and the price tags that are associated with them also vary by a wide margin. This uncertainty may demotivate many. But if one starts saving regularly and gradually increase the investment he can accumulate a large corpus. Such large sums then can be earmarked for specific financial goals such as retirement, health funds and charity.
Interest rate risk is taken care of
Bond funds were earlier seen as relatively safe haven. As the business cycles turn shorter, interest rate risk becomes prominent and make bonds market volatile. An upsurge in interest rates, led to a fall in bond prices. Volatility in bond funds have unsettled many investors. If you invest at regular intervals, you get to buy the bond portfolio at various price points. Over the long term, the interest rate risk stand minimised.
If you are an investors in assured returns instruments with a maturity date such as fixed deposits, bonds and fixed maturity plans, investing regularly helps. You end up locking in yields at various levels. As the instruments mature at various point of time, you are not exposed to the risk associated with reinvestment of the proceeds.
Reduce market timing risk
Systematic investment plans of equity mutual funds are lapped up by savvy investors for this reason. Ajay Kinjawadekar, Founder of MoneySafe Financial Services, says, “As you invest at regular interval, you do away the risk of investing all your money at the peak of the market.” It lets you invest in a volatile asset class such as equity without losing peace of mind. If you have a long term view on your equity mutual fund investments, you are more likely to accumulate wealth.
Ajay Kinjawadekar sums up, “Increase the instalment amount at regular interval. Your increase in investments should be more than your increase in income.”
Disclaimer: The views and investment tips expressed by investment experts are their own and not that of the website or its management. Users are advised to check with certified experts before taking any investment decisions.