InvestorQ : Can you suggest some simple steps to ensure that I am able to save and invest productively for the future?
Priyanka N made post

Can you suggest some simple steps to ensure that I am able to save and invest productively for the future?

Answer
user profile image
NISHA Nayak answered.
11 months ago


There are no hard and fast rules, but some basic guidelines can help you to save and invest productively for the future. There two basic rules you need to keep in mind even before you start. Firstly, you must make saving a target and not a residual item. It will never happen that way. Secondly, focus on equities, only they can create wealth over the longer time frame. You don’t get too far with bonds and liquid funds in the long term. Here are some important steps to ensure that you save enough.

a) Start off with your long term and medium term goals in mind. You need to save and invest towards a target. If you don’t know where you want to reach, it really does not matter how fast you run. You begin with your specific goals like retirement, children’s education, foreign holiday, home loan margin, car loan margin etc. Once the future goal is set, you work backward and determine how much you need to invest at what rate?

b) Squeeze the maximum out of your income. If you cannot bring yourself to save the maximum out of your income, then no amount of financial smartness will help you create wealth. For example, if there are two persons who start out together in their careers with the same income and if one is able to save more, his wealth creation will be larger. For example, can additional saving of Rs.5,000 per month can translate into a wealth effect of nearly Rs.2 crore over 25 years.

c) Don’t let money idle and let it be allocated as per risk. That means long term money should go into diversified equities and medium term money can go into debt funds or balanced funds. Short term money is best parked in liquid funds or liquid plus funds. Look to get the maximum risk adjusted returns in each asset class.

d) Be systematic in your approach to investing. What exactly do we mean by systematic? Don’t try to time the market or catch the bottoms and the tops of the market. That is not only tough but also it does not add much value. Instead, look at a more calibrated approach to saving regularly. Not only it syncs with your income flows but also gives you the benefit of rupee cost averaging. In other words, when prices go up you get the benefit of value effect and when prices are down you get the low cost effect.

e) Monitor regularly with reference to your goals. That is the Holy Grail. Mao Zedong said that a cat is a good cat as long as it catches mice. By that principle, your investments and savings are meaningful if they help you meet your goals. That has to be reviewed on a periodic basis and you will have to rebalance the portfolio where it is justified.

You can save enough in the long run if you get your savings discipline and your investment risk matrix right. Due to the power of SIPs in the modern world, it is possible to create big wealth even with small contributions. It is just that you need to start early and start saving. Don’t worry about the quantum, you can build that slowly. Keep saving as a discipline. Above all, rely on the power of equities.