Life seems to inherently unfair especially when it comes to investment returns. Wealthy veteran investors seem to keep growing richer at the expense of newer investors. One key reason for this is the fact that veteran investors understand the rules of the investment game better than the amateurs. The good thing is that some of these rules are pretty straightforward and yet they can work wonders in generating successful investments. The following are some handy tips to help you invest like a pro:
Make a plan and stick to it
If investing is all about making money, it is best to have a plan regarding how much you can invest and what is your investment target corpus over a period. In some cases, goal-based investing i.e. saving towards a planned future expense such as marriage, child’s higher education, retirement etc. might be the right way to go. In other cases, having a monthly investment target may be the better choice. What’s more, your investment plan needs to be flexible enough to be modified according to changing market scenarios and your own changing requirements. For starters perhaps it is best that your plan ensures disciplined investing as that will help you in the long term. One way to help you stick to your proposed investment plan is to opt for a systematic investment plan or SIP in mutual funds. The SIP route allows you to make small investments periodically and stay invested in the long term without stressing your finances in the short term. This can help you achieve your investment targets in the long term.
Have Realistic Expectations
You might hear stories of people earning big on the stock exchange or generating 25% returns on their investments, but that is the exception to the general rule rather than the norm. You need to have realistic expectations from your investments and avoid moving your money around trying to chase astronomically high returns. As an investor, the first things to keep in mind is that it takes time to make money hence you have to think about the long term prospects instead of chasing short term returns. That’s why you should think with your head and manage your expectations keeping the long term view in mind.
Understand Asset Allocation
Making investments regularly is definitely a virtue, however, investing all of your savings all the time can have unintended consequences. Allocation is all about spreading your money across different instruments – equity, debt, gold, cash, etc. in order to manage overall risk, liquidity and returns. Early in life, when you have fewer responsibilities, it might be ok to stay invested only in low liquidity investments such as equities. However, as your responsibilities increase, you need to have money available for emergencies. Hence the need to include some liquid investments such as cash and debt schemes like liquid funds and ultra short term debt funds into your portfolio. The exact allocation of assets across various investment categories is of course dependant on the financial responsibilities and unique investment goals of each individual. Thus, it might actually be a good idea to consult a financial advisor in case you aren’t able to figure it out by yourself.
Know Investment Risks
Every investment comes with risks attached. It is just the degree of potential risk that varies from one investment to another. While government-backed schemes such as PPF are among the least risky investments, market-linked investments such as equity mutual funds feature relatively higher levels of risk. Unfortunately many investors especially new ones often fail to recognize the simple fact that returns are not guaranteed in case of any market-linked instrument including potentially low volatility debt schemes. Do not make this mistake. Make sure you know about the risks associated with each and every investment in order to make an informed decision whether a given investment option is right for you or not.
Never Borrow to Invest
You might have heard market experts say that market movements are mainly influenced by two emotions – greed and fear. Greed predominates when markets are moving upwards and some people start speculating that this upward trend will continue. While speculation by itself is enough of a detriment to successful investing, what’s even worse is that many a times, such speculation is funded by borrowed money. In case you are borrowing money to invest, it will hurt your financial well-being in the long term. A simple reason for this is the fact that you have to bear the cost of borrowing i.e. interest payouts which will eat into your future profits (if any). This is not an approach that promotes successful investments in the long term hence you must never borrow to invest. Instead, in case you already have outstanding debt, you should focus on paying those off first before you start making investments.
The following is a short list of possible risks and potential returns of some popular investments*:
| Investment Type | Potential Risk Level | Potential Returns |
| Direct Stock and Bond Investments | Very High | High (stock specific) |
| Equity/Equity-oriented Mutual Fund | High | 10% to 15% |
| Debt Mutual Fund | Low to moderately high | Up to 10% |
| Government-backed Schemes | Very Low (fixed returns) | 7 to 9% |
*The returns of market-linked fund instruments are based on historic average category returns. The facts and figures are for illustrative purposes only and subject to periodic change.