How to invest when you don’t have much to invest
The most important rule of investing isconsistency. Putting aside money for your financial goals every month is anabsolute must. How much you end up with does depend on how much you invest, butyou also need to keep in mind that longer tenures of investment can giveamazing results.
Let us take an example of Rs 1,000 beinginvested every month in any investment avenue that generates a modest return of12% per annum over a 30-year period. The investor will end up with around Rs 35lakh at the end of 30 years. This is much higher than the invested amount of Rs3.6 lakh. And 12% is a very achievable return.
In contrast, if you invest this amount inlump sum in a year, you will only end up with Rs 4.032 lakh with a 12% return.
This goes to show that investing in smallamounts—even if it amounts next to nothing—is any day better than investing inlump sum. The conclusion: invest even when you don’t have much to invest.
Before you start investing, there are twothings that you absolutely need to have in place:
1. Emergency fund:This should ideally be around 3 – 6 months’ worth of your monthly expenses.This amount should be invested in secure and liquid investment options like liquidor ultra-short term debt funds or even a bank deposit to ensure that theprinciple amount is available in case of any emergency. The idea is to ensurethe money is protected, but also easily available.
2. Pay off expensive debt: Ifyou have any debt, repaying that before you start investing is very important. Otherwise,you will only end up paying more. This will nullify any profit you couldpossible earn from your investments.
After you have these two parameters in place,it’s time to start investing.
There are various investment avenues for thesmall investor and the amounts that can be invested every month can be aslittle as Rs 500 a month. You do not need to put aside thousands of rupees whenyou start. Start small, but be consistent with your investment. Let us seewhere you can put your money and what are the pros and cons of each investment:
1. Systematic Investment Plan(SIP): A mutual fund company offers SIP where youmake a small investment every month. It is the perfect tool to create wealthover a period of time. Investing in SIPs over a longer duration ensures thatyou enjoy lower cost and also benefit from the power of compounding—the abilityto earn a higher returns by earning an interest on the previous interestpayments. Depending on your risk appetite, the SIP can be chosen to invest in differentkind of funds like equity, debt or balanced. This allows your to tailor yourinvestments as per your risk and return requirements. SIPs can also be done intax-savings schemes to get the double advantage of equity exposure with taxsavings. Such schemes have a lock in period of three years. One thing you needto keep in mind is that there are no penalties for missing an SIP paymentunlike a loan EMI. So even if you miss one payment your investment is safe andyou can continue to invest further in later months.
2. Systematic Equity Plan(SEP): An SEP is similar to an SIP in a lot of ways.In an SIP, the investor buys units in a mutual fund. In an SEP, the investoreither buys a certain number of shares or buys the number of shares availablein a certain amount of money. The investment is made only in shares chosen bythe investor. For example, you may choose to buy 10 shares of ABC Company or sharesworth Rs 5,000 of ABC Company. The choice of either fixing the number of sharesor the amount of money invested is left to the investor. Almostall brokers offer SEP investment. The benefit of an SEP is the averaging ofcost over time. Since the prices of stocks keep varying on a day to day basis,an SEP allows the investor to buy a particular stock at different prices. SEPinvestment does not have any lock-in period either. So the investor is free to selloff the shares and liquidate the investment at any time.
3. Short Term Debt Funds:When you know that you need a certain sum of money at a fixed date in thefuture, but do not want to keep the money idle for that duration, the bestoption is to invest in a short-term debt fund. The amount you invested isprotected in this fund as the investment is made in debt instruments likegovernment bonds only. The fund often gives higher returns than bank fixeddeposits. Moreover, you can withdraw the money at any time unlike FDs. But theinvestor needs to keep in mind the exit load levied by the fund, which canrange from 0.5% to 2%. This should not eat away the extra interest earned.
4. Liquid Funds:These are mutual funds that invest in money-market instruments like certificateof deposits, treasury bills, commercial papers and term deposits. These aresafe, short-term investment instruments. These mutual funds have no lock-inperiods or entry and exit load. The withdrawals for the fund are processedwithin 24 hours on working days. This makes liquid fund a very good investmentoption for anyone looking to park their money for a limited amount of time.
No matter how little you put aside, everyonecan invest for a better financial future. Having the discipline to do so is themost important aspect.