Being a successful investor doesn’t mean that you have to make lucrative profits better than your friend or Rakesh jhunjhunwala. It simply means were you able to meet your financial goals comfortably with your investments. Though personal finance is always personal and varies according to individuals, there are certain habits that are common in a successful investor. We shall walk you through those common qualities in this post.
Know the why
The most important thing before starting a journey is to know the destination, similarly before starting an investment you must know the goal you are investing for. The first step to achieve financial success is to list down all your financial goals along with the time horizon of each goal. The number of goals may vary person to person based on various factors but you should have a separate asset allocation and investment strategy for each specific goal.
Know the where
After deciding on the goals, you need to decide where to invest to achieve these goals. This has to be done keeping in mind two factors, one your risk appetite (i.e. Risk taking capability) and other is the time horizon for the goal.
Basis these two factors you can decide on the asset allocation for each goal. For ex. for long term (more than 5 yrs) goals, Equity Mutual Funds are a good bet, and according to your risk appetite, you can go for Small cap, Balanced or Large cap funds.
Another example would be that for short term goals, say less than 1 year it is prudent to invest in liquid funds which are safe and provide returns better than the savings bank account.
Understand the basics of Investments
Before you invest you should be aware of some basics such as power of compounding, the risks associated with different asset classes etc.
Compounding is the simplest and the most powerful tool available for investors. Compounding involves earning interest on the interest earned. The two major components of compounding are Interest rate and Time period, and though an investor cannot control the movement of interest rate, the time period of investment is completely in his/her control. The table below explains the power of compounding.
If you look at the above illustration, to meet an investment goal of ₹ 50 Lakhs one has to invest ₹ 67,694 for 5 years total investment to be made is around ₹40 Lakhs. On the other hand if proper time is given for compounding to take effect, only ₹8,488 monthly investment is required for 20 years and total investment also comes down to around only 20 lakhs.
To make full use of compounding early investment is a must.
Discipline is required in all walks of life, investing is no exception. Being regular investor has the advantage of rupee cost averaging, that is, buying less when price is high and buying more when it is low. So, for example, your target is to invest ₹2,40,000 a year, you spread it out in monthly installments of ₹2,000. This can be achieved easily through SIP investments in a mutual fund.
An important aspect of being a disciplined investor is to automate the investments as much as possible. Automation removes the emotion part from investing and does not let greed or fear take over during different market cycles. SIPs score on the automation part too. You may check out our WealthTrust app to explore the top funds where you may start an SIP.
Discipline does not mean to invest and forget, a discipline of reviewing the portfolio at least once a year is also very important. In the yearly review you need to evaluate the investments and make appropriate changes according to the performance and any changes in your goals.
Diversification is an important principle for investments. As the saying goes, you should not have all your eggs in one basket. This is the main reason why mutual funds gain more traction as they are diversified by the inherent nature of the product. For example if I am a direct equity investor and invested in a single stock like Kingfisher I might lose my entire money due to legal action against the company. Whereas when I invest in a mutual fund the impact of any particular stock would be minimal. Similarly, if I had invested in bonds of Ballarpur industries Ltd (BILT) directly I would have lost my money due to the recent downgrade in its ratings. If I had invested in the same instrument through Taurus mutual fund I would have lost somewhere around 7 to 11 % which is comparatively better in terms of capital protection.
Maximize the returns
To make full use of your investments, you should always focus on maximizing your returns. To do the same you must understand the taxation that applies to your investments. For example, Long Term Capital Gains (investment for more than one year) are tax free in Equity mutual funds while Short Term Capital Gains are taxable at 15%. Similarly, Short term Capital Gains tax (investments less than 3 years) for Debt mutual funds is as per the tax slab of the investor while Long Term Capital Gains are taxed at 20% with indexation benefit. To compare, the interest from Bank FDs is taxed as per the tax slab of the investor irrespective of the FD term.
For tax savings through 80C, you can opt for ELSS as it has more growth potential and less lock-in period than other investment options in section 80C.
One of the most important points while investing is that, when you invest in mutual funds, always invest in direct mutual funds, so that no commission is deducted from your investments, this would help you to save 1% to 1.5%. At WealthTrust platform we offer you handpicked Direct Mutual funds in a single click.
Do not Fall in traps
If anything sounds too good to be true, it probably is. Follow this approach while screening the investment options; do not fall into the trap of high and improbable returns. There are several scams happening daily around, never get fooled by such offers and invest only in the instruments that you trust through the platforms you know are secure and would not run with away with your money.
Avoid following the herd while investing, for example these days investing in IPOs is a trend, however this can be risky if done without through research.
Also, plan your investments timely so that you do not fall in the trap of ineffective and complex investment options at the end of year when you do not have much time to research and decide. Avoid complex products such as ULIPs & Endowment plans of Life Insurance.
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