Investing and growing your money is a complex challenge and this requires attention from all investors. There are no easy routes to achieving success and this will require constant efforts. Often some simple steps are all that is required to achieve your goals and many people miss because they seem to be obvious. A new outlook and mindset is the key to ensure that you too move in the right direction.
Introduction
Every investment should be directed towards your specific financial goals. As an investor who has been investing for some time period you should check that you have started off well and will build on this position. One of the ways in which you can achieve this is by taking a long term approach to the entire investment process. The longer the time period for which you continue investing and then hold the investments especially when it belongs to asset classes like equities the greater the chance of success in the overall efforts.
Long term investing can be defined as putting money into an investment and then holding it for a period that can stretch for several years and in some cases even a decade or longer. There are two aspects of long term investing where the first one involves making the investment over a period of time. The other aspect involves maintaining the investment without making continuous buy and sell decisions. The time period in the term long term could vary significantly between a few years to a lot more and hence this is something that needs focus to determine the right period for you as an individual investor.
Reaching goals
Your financial goals have to be at the centre of all your saving and investment efforts. This will involve giving additional attention to the process of setting goals and then laying out a plan that will help in the achievement of the goals. The ability to reach the goals will depend upon the choices that you exercise while setting up your investments. There will be multiple goals for you as an individual investor an! d each of them will require a separate effort to try and achieve them. There can be lots of reasons ranging from poor choice of instruments to overall weak market conditions that can hamper your efforts but this should serve as a reason for you to try even harder.
Tackling this tough challenge is possible by taking a long term approach. This will cover an effort to plan for the investments in a manner whereby you are willing to stay with them for a significant period of time. Once you do this the short term changes or effects will not remain relevant and these will have little impact on the overall situation. This is a way in which the risk in the investment goes down. Take an example where you have to reach a goal of accumulating a sum of Rs 1 lakh. After an initial investment of say Rs 25,000 there might be good progress towards the goals. A limited time period like 5 years for achieving the target would put pressure on you and when things get tough in the third year this could lead to some decisions that might not turn out to be effective. On the other hand if the time period is longer then this setback is evened out by additional growth in the next few years. This will ensure that even with a small contribution in each year achieving the goal might not be a tough task.
Indian scenario
Equity markets in India are extremely volatile and there could be significant changes in the prices that can lead to gains or loss of capital in a short time period. There is a high possibility that in the midst of sharp changes in value you as an investor are not able to make the right investment decisions. This can be tackled by investing amounts over a period of time as well as remaining invested for a long time period. A way to reduce the risk is by using mutual funds to invest so that there is the benefit of diversification available. Consider the situation for large cap mutual funds that are present in the Indian market. These are mutual funds that invest their corpus! into lar! ge cap stocks and these are considered to be slightly less risky than mid cap mutual funds due to the nature of its investments.
Short term movements in the equity markets can have a large impact on the results for the investors. In September 2012 there was a rally in the equity markets and this is reflected in the position for the last one year as 91 per cent of the funds ended up with returns of more than 10 per cent over this time period. This masks the tough position that was present as over the three and five year time period just a handful of funds managed this position. However by October 2013 around 30 per cent of the funds had a return of more than 10 per cent. The further you go the better it becomes as over a 10 year period all the funds managed an annual return of more than 10 per cent which is a significant amount.
Reducing cost
Costs incurred while managing your money eat away at the total returns earned by your investments. A simple way to tackle the situation is by listing out each of the cost elements and then making efforts to reduce the amount spent. The final returns matter for you as an investor so a situation where you earn a gross return of 14 per cent and a net return of 12 per cent after reducing the 2 per cent expenses is better than a situation where the gross return is 15 per cent but expenses total 5 per cent taking the net return to 10 per cent.
As a mutual fund investor sticking to long term investing will help you to reduce the overall costs. The initial expenses at the time of buying the mutual fund would include some small expense like brokerage or fees to a distributor if these services are used. When the holdings are sold there would be again some brokerage fees if this is sold through a stock exchange plus securities transaction tax if the investment is in an equity oriented fund. In the interim period there would be the annual running expenses of the fund. If the investment is held for a period of mo! re than a! year then the entire gains earned would be tax free in your hands in case of an equity oriented fund or taxed at 10 per cent without indexation or 20 per cent with indexation in case of a debt fund.
On the other hand when it comes to a short term investment every time there is a transaction there would be a small part of the total figure eaten up by the transaction charges which would include the brokerage fees if transacted on a stock exchange or distributors fees if their services are used. There will be the running expense on the fund for the period that it is held. Any short term gains that are earned will be taxed at 15 per cent for equity oriented funds or at the marginal rate after being added to the income for a debt oriented fund.
All this could end up ensuring that there is a larger impact for you at the end of the day and that it might not be worth so much effort.
Compounding effect
The real benefit of investing for the long term lies in two separate areas. One of this involves a continuous investment over a period of time so that this would make even tough goals seem very easy to achieve. The breakup of the investment into small parts makes it seem affordable. A small investment of just Rs 5,000 a month growing at 8 per cent per annum started by you at age 25 can lead to increasing earnings over every additional 5 year time period. Investing a sum of Rs 5,000 per month for 10 years will result in the accumulated figure of Rs 9 lakh. Investing an additional sum of Rs 3 lakh over the next five years will lead to the capital jumping by over Rs 8 lakh to Rs 17 lakh. This figure increases and every additional investment keeps generating a larger amount of wealth for you so from age 45-50 the additional Rs 3 lakh investment lead to an accumulated gain of nearly Rs 27 lakh.
The other aspect is to actually maintain the investment for a significant period of time so that due to the compounding or accumulation of the earnings the figu! re contin! ues to grow over a period of time. If there is a sum of Rs 50,000 that is invested and this grows at 9 per cent per annum then the earnings in the first year would be Rs 4,500 but in the 15th year it would be equal to 30 per cent of the initial investment and by the 30th year it would be equivalent to the initial investment each year. The key is thus to remain invested over a period of time so that the money compounds and the real benefit is visible to you as an investor.
Use of long term investing
Achieve multiple goals
Your existing financial situation is one of the main reasons why you should adopt the strategy of long term investing. As an existing investor you will have several goals to be achieved so it is not a question of just one or two investments but a comprehensive look at your portfolio. This will include planning for your children plus your goals for retirement as well as spends in the regular course of events. Multiple goals fighting for a share of a lower investible amount can be tackled by a systematic approach. This is achieved by investing regularly and staying invested for a long period of time and as the period increases your confidence in the process will also go up making you a better investor.
Accumulation of wealth
The goal of many people is to ensure that they have accumulated wealth for various purposes like children's education or retirement planning and this is possible only when the long term investing approach is taken. Taking this view will enable you to slowly and steadily build your financial position using several assets and the accumulation of wealth will benefit future generations. Investing is not a smooth one way ride but comes along with pitfalls and dangers so long term investing will help you to ride out the tough times.
Suitable conditions
A growing economy like India raises the scope for appreciation in the value of various asset classes. It is difficult to predict which area will do well in the short ! term but ! over a period of time there will be rise in the value of various assets as the economy grows. As an existing investor you should make use of these favourable macro economic conditions and plan out your investments for the next several years to benefit.
How should I tackle this situation?
A few simple steps should help you to navigate the path around your finances in a simple and easy manner. As an existing investor you would face a huge amount of choices and this includes decisions about selling your existing investments to route the money to some other area. A way to tackle this high pressure situation would be to use mutual funds for investing as professional fund managers who devote their entire time to managing money can help your money grow over a period of time.
Ensure that you are investing from an early period in your life as it gives you a longer time period to grow your money over your life. Also invest consistently without any disruption in the process and this will be a way to build wealth over your life. Apart from this there will be tough times when your investments might seem to be stopped growing and in many cases this might have declined a bit. If you are convinced of your investment choices then brave this period and stay invested because you will be able to ride out the storm and emerge stronger and better than before. Ultimately you need to give yourself the chance in life to let your money compound to ensure a better chance of success.
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