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Invest early and systematically to achieve long-term goals

Long-term goals like children's education, marriage and retirement planning generally require us to have to accumulate a large corpus.

Hemant Rustagi        Last Updated: July 15, 2014  | 14:10 IST
Invest early and systematically to achieve long-term goals

Hemant Rustagi
All of us dream to provide the best education to our children and have enough to lead a comfortable retired life. However, many of us don't do enough to realise these dreams.

While some of us don't even start the investment process thinking that there isn't enough money available for investment, there are others who do start the process but don't invest in the right asset class to build the corpus required to achieve these long-term goals.

It is quite common to see investors opting for debt and debt-oriented instruments like fixed deposits, bonds and insurance products such as endowment plans even while investing for their long-term goals, as they fear losing their capital. They fail to realise that, in the long run, inflation is a far bigger risk as it erodes the value of their money.

That's why inflation is often called the silent killer. No wonder, despite investing for years, they are not able to accumulate the required corpus and hence end up compromising on some important goals of their lives.

Besides, there are investors who start investing without a clear time horizon i.e. without having a clear idea about how long they can remain invested. This often results in edginess in their behavior every time the market turns volatile and at times prompts them to make ad hoc decisions. In the process, many of them end up making abrupt changes in their asset allocation and suffer in the process.  

As we all know, long-term goals like children's education, marriage and retirement planning generally require us to have to accumulate a large corpus. Many investors often get overwhelmed by the very thought of having to accumulate such a large sum and hence keep postponing their investment process because they feel they may not be able to achieve their goals with smaller sums of money that they can afford to invest.

The fact, however, is that by having an investment plan in place and starting the investment process early, you one can achieve your long-term goals even by investing smaller sums of monies. Remember, investing early is a very simple yet powerful method to achieve long-term goals. The earlier you start, the longer your investments have the time to grow.

In other words, investing early allows you to benefit from the "power of compounding", which ensures that there are no shortfalls in the targeted amounts. Simply put, compounding helps you make money on the money that you have already earned. However, it is important that you formulate an investment plan before starting your investment process.

Investment planning involves defining your goals, assigning a time horizon and working out the amount required to achieve each of the defined goals. This process helps you in deciding the right asset class for each of the goals. For example, for a long-term goal, investing in equity is the best option as it has the potential to provide positive real rate of return i.e. returns minus inflation. This factor is crucial considering the escalating costs for long-term goals.

In other words, you must consider the long-term impact of inflation on your investments. Remember, the level of inflation risk depends on the length of time you have to achieve your investment objectives. For a short-term time horizon, volatility is a bigger risk than inflation. That's why a short-term investment strategy should focus on stable principal value through a portfolio consisting of interest bearing securities and long-term strategy should focus on an asset class like equity that has the potential to beat inflation over longer time periods.

It is important to know that for a long-term investment, the average return rate becomes more important than volatility. It is a proven fact that over the longer term, volatility tends to work itself out due to offsetting of good years against bad years. Remember, the way you save as well your investment strategy will depend on many factors like how much you wish to save and how long until the money is needed. Mutual funds can provide an excellent vehicle to invest for your long-term goals. They offer diversification, flexibility and simplicity. Besides, investing through a tax-efficient vehicle like mutual funds can help you accumulate more over the years.

Considering that most investors can only make small contributions on a regular basis to achieve their long-term goals, a mechanism like a Systematic Investment Plan (SIP) can be a great tool to benefit from averaging as well as power of compounding. A steady plan, both in terms of savings and investments, help pursue financial goals.

What SIP really means is that you invest a fixed sum say every month. When you invest a fixed amount, say Rs 10,000 a month, you buy fewer units when stock prices are high, and more units when stock prices are low. Besides, you take advantage of the fact that over a period of time stock markets generally go up, so your average cost price tends to fall below the average NAV. This "averaging" ensures that you buy at different levels, without having to worry about the market levels.

Though SIP is often perceived as an option only for small investors, the fact is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows you to invest at different levels without having to worry about market movements in the short term.

Remember, when you opt for regular investing, you abandon any strategy that might control the timing of your investments. In other words, you would continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.

However, if you have some money that can be allocated towards your long-term goals, don't hesitate to invest it as a lump sum. It has been proven time and again that for a long-term investor, making a lump sum investment is not an issue. In fact, a combination of systematic investing and periodic lump sum investments can get the best results over time.

If you are not comfortable with 100 per cent exposure to equity funds, there are equity-oriented balanced funds. While the equity portion in these funds aims to provide growth, the debt portion provides stability. However, before starting your investment process, you must know that risk is an inherent part of investing and there is a direct co-relation between risk and return.

(The author is CEO, Wiseinvest Advisors)

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