Fundamentals of Investing – Part 1

Fundamental principles of investment

As is rightly said, “A man is the best doctor of himself.” He knows through his senses and experiences what is most important for him. This seems to aptly apply in personal finance.

Company agents selling insurance and investment products do their job by highlighting the benefits of the products in their basket, which may or may not best satisfy your financial needs. So instead of following them blindly, be in-charge of your personal finance.

Following are the fundamental principles of investment with some explanations. These principles will help you in ensuring that your hard-earned money genuinely works for you:

1) Start Early & Invest Regularly

The discipline of investing a set amount regularly ensures that you have a check over your spending habit. And when you start early, you have sufficient time to collect the required corpus to fund various financial goals of your life.

Also you get the benefit of compounding of interest, which helps in the larger growth of your investments over a longer period of time. It just means that the money which is invested early starts working for you early. Larger is the period of its investment, more it works for you, earning more interest and interest on interest.

Following table illustrates how an amount of Rs 10,000 invested today @ 10% per annum grows, and grows faster over longer periods.

Early and Regular Investment

If you are young or in the middle age, this principle of starting early & investing regularly very much applies to you & your family.

If you have already fulfilled or are on the verge of fulfilling your family obligations, this is worth recommending to your children & their families for the well-being of their long life. Even generally, if anyone feels it’s necessary, it’s never too late.

2) Look for Higher Return & Keep Expenses Low       

All of us have our long-term financial goals in life. A person starting his career and married life may have the goals & obligations of children’s education, their marriages, house purchase, his/her retirement life, etc. With the constant effect of inflation, the target amounts for these goals become surprisingly huge. To achieve these huge figures, it is very necessary to focus on expected returns on investments, even at a risk.

There is big difference over longer periods in the maturity values of investments which give returns 6-8% and those which give 13-15% per annum. Following example makes this clear:

a) Suresh is a conservative investor. He started investing Rs 5,000 per month regularly 25 years ago in a Provident Fund account earning 8% per annum compounded annually. He has accumulated an amount of Rs 47.55 lakh today.

b) Anil also started at the same time. On the advice of his financial planner, he has been investing Rs 5,000 per month in equity investments which gave him about 15% return on an average. In these 25 years, he has built up a corpus of Rs 1.62 Crores for his retirement life.

What we see in this example is that although both started early and invested regularly, the corpus of Anil is about 3.4 times that of Suresh. While assured returns are important, higher returns must be aimed at in the long-term investments. Taking some risk here is justified as it can be managed in the longer period.

Also the expenses like brokerage, taxes, commissions and other charges reduce your actual returns. So, ensure that the asset or security you invest in involves lesser expenses, and avoid frequent churning of your portfolio i.e. frequent selling and buying of shares or other securities.

(to be continued…)

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Sukhvinder S SidhuThe writer, Sukhvinder Sidhu, is a ‘SEBI registered Investment Adviser’ and a ‘Certified Financial PlannerCM’. He writes to contribute his bit to create financial awareness, so that readers take right personal finance decisions for a better financial life for themselves and their families.
Know more about him.