Investments are essential part of our Financial Strategy. They help us save for the future and also provide a decent growth of our monies over a period of time. Prudent investment decisions are essential to grow our money. Incorrect or speculative decisions can lead to erosion of our wealth rather than getting gains out of the investments.

I have tried to cover the key considerations when investing and a few golden rules you need to follow.

Key Considerations

Investment Frequency

When it comes to frequency of investments, we always have a question on how regular is defined. Should it be every day, every week, once a month, once a quarter or once a year? Most of us would opt for investing once to twice a month as our incomes are usually set at that frequency. Few of us opt for a lump sum investments every quarter or annually linked to their bonus cycles. From a pure cash flow perspective, our income frequency should dictate our investment frequency if we are putting money directly in an equity or mutual fund.

A better option, for lump sum investments is to put the money in Liquid or Debt funds and initiate a systematic transfer plan to equity-based funds (equity, international equity, balanced). At this stage, you can have an option on the frequency of transfer of your funds. You can choose from daily to annual. There are minimum amounts transfer limits set by the fund house. My recommendation is not to go with daily or annually. Daily gets a lot of noise from the daily fluctuations in the markets and the overall returns diminish. Annual investments have exactly the opposite impact – they aren’t able to catch the more frequent fluctuations in the market and you may not get good returns. Optimal investment frequency is weekly, bi-weekly or monthly. If you have multiple such funds, that are transferring money on a monthly basis, you should space them out so you can catch a higher frequency. For example, you have a bimonthly transfer plan from one mutual fund that transfers money on the 1st and 15th of every month. You can use the other bimonthly transfer plan to invest on the 6th and 21st of every month. That way, your combined investments will effectively become weekly. I personally avoid investing on the first and last days of the month and investing on Mondays; but that’s me – you may have a different opinion. Neither of us is right and neither of us is wrong.

Another important aspect is that for regular investments, leave it to automatic withdrawals or transfers. Don’t try to do all this manually and try to time the market. At first this may sound manageable for you but it has a tendency to soon get out of control.

Start Early

This is the golden rule of any investment. This cannot be emphasized enough – you need to start early. Start saving from the day you receive your first paycheck. If you are a parent, keep aside some money for your kids soon after they are born. The most important factor here is to get into a savings habit and sustain it during your earning years. Compounding of your money will work best if you have more years to invest. You can start low if you don’t have enough investible income in your initial years and gradually increase it. If you are 35 years old and haven’t started investing yet, now is a time. Today is better than tomorrow and tomorrow is better than the day after.

Be consistent & patient

Try and make this a habit. Don’t get bogged down by stock exchange crashes or your investments giving you abnormal gains when you are in the initial years. Resist your temptation to discontinue the investments. During the initial years, you may see the investments yielding negative returns. This should not be a deterrent. Know that more units are being purchased at lower levels and when the price increases, your investments will grow and catchup.

You may reduce or hold on your investments if there are big expenses expected for a certain period of time but then resume them once that event is under control. Treat investments as the 2nd category just like your expenses. You won’t be rich if you have a big bank balance (in fact your money will start reducing due to the fact that it is earning less than the inflation). You will be rich (or be progressing on that path) if your secure investments are beating the inflation.

This topic deserves special attention. I recommend you to read my blog Importance of Regular Investments – Myfinancejournal

Revisit Performance v/s Objectives

From time to time, review your investments and determine if there is a need to make any amends. At a minimum, you need to review once a year. Start with a quarterly frequency soon after you initiate your investments and then move to annual review frequency gradually over a period of 3-5 years. By that time you would have a better understanding of the products in the market and which of them will suit your investment style and preferences.

When you are reviewing, make the following sanity checks:

  • How has the fund performed compared to other funds in similar category?
  • Has the net assets under management increased or reduced?
  • Have the entry and exit loads changed?
  • Has the fund manager changed?
  • Are your investments providing you the expected returns?
  • Are there any better products available in the market that you can possibly switch?

Know that over longer period of time (beyond 7 years), your equity investments should return more than 7% YoY.

Switch between Asset Classes

Another annual activity that you can do (especially in instruments like 401K, 529 plans) the portals allow you to rebalance your portfolio. Let’s say on day 1, you have allocated a third to be invested in equity, balanced and international equity respectively. After a year, your international equity weight is 40%, your balanced weight is 35% and your equity weight is 25%. You can with a click of a button make the proportions 33% each. What this will do for you is that the 6.7% excess amount from international equity and 1.7% excess amount from balanced funds will be transferred to your equity fund. This may sound silly at first but when you examine this closely, you will realize that balancing the portfolio is a good thing to do. You are effectively booking a profit on the gains that you made in international equity and balanced and investing more in an asset that did not perform well during the same period. If you don’t have a button click option, you would have to do this manually in a spreadsheet and do the transfers online once the amounts to be transfer to and from are known. This methodology needs to be adopted when your overall portfolio is meeting your stated objectives.

Another key trigger for switching between asset classes is when there are drastic changes expected in a particular asset class. If you know (and are sure) that there is a 10% correction expected in the equity markets, you may want to move some or majority of the money from equity funds to debt or liquid funds. The reverse will need to be done when you are expecting the markets to gain suddenly. I would suggest that you do this only if you have a very high surety that the event will occur and don’t do it every few weeks or months. No one has been able to time the markets and predict the future.

Let’s assume for a moment that your investments are yielding you the expected returns. If your conditions change or are expected to change and impact you materially, you may want to move to a higher or lower risk category. For example, just before you are approaching your retirement, you may want to start transferring money each month to a less risky asset class.

Dividend Payout v/s Reinvestment

Most of the funds that you purchase would have 2 flavors – dividend payments and dividend reinvestments. If you want your money to grow and you are not dependent on dividend payouts as a source of your income, then you would be better off choosing dividend reinvestments. This will help your money grow faster. After several years of investments, when you are ready to reap the benefits from these funds and they become a source of income for you, you’d still be better off by using dividend reinvestment option and opting for a systematic withdrawal plan.

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