Investing is as much about method and process as it is about skill. Most of us tend to believe that once we acquire the requisite to identify good investments, the job is done. That is not the case. After opening a Demat account, Identifying a good investment or interpreting a trend is just part of the whole job. There is normally many a slip between the cup and the lip and hence it is always essential to be able fine tune the process and method of investing also properly. If you want to really make a difference to your life then you must master the art of investing properly. Here is how learning to investing properly can make a substantive difference to you.
Better understand the time value of money
What most investors always used to miss out in the past was that money has value because it has time value. In other words, since money can earn interest, its present value will always be lower than it’s worth in the future. For example, if you have Rs.100 today and keep it under your pillow then it remains as Rs.100 even after 1 year. On the other hand, if you put this in a 10% 1 year bond then it grows to Rs.110 in 1 year. In other words, Rs.10 is the opportunity cost of keeping your Rs.100 under the pillow. This concept of time value has two implications for you as an investor. To make money work hard for you, it has to be constantly deployed in productive investments. Secondly, the whole idea of creating wealth is based on the power of compounding. That means not only must your money be invested in productive investments but even the returns should keep compounding over time.
Understood the importance of starting early
One of the popular beliefs in the earlier times was that investment and wealth creation was only for the wealthy. The middle class had to be content with a hand-to-mouth existence. That is not the case any longer and people are fast learning this. A small investment of Rs.5,000 per month over 25 years can compound to a couple of crores without any additional effort. The earlier you start, the longer you invest and therefore your capital and your returns manage to earn more returns over time. This realization has change the way investors are approaching mutual funds and SIPs today.
Understanding the power of equities
Have you recently tracked the flows into equity mutual funds? The numbers are staggering. The AUM of the total mutual fund industry stands at around $400 billion with nearly $140 billion coming through the equity route. Indian mutual funds collect nearly $1 billion each money in the form of equity SIPs. All these trends point to the reality that investors are sold on to the concept of investing in equities. They are realizing that if you want to create wealth in the long run with calibrated risk then the only option is to invest in equities. Since direct equities have their own risk, most investors prefer the relative safety and stability of equity mutual funds.
Understand the power of diversification
Most investors gradually understand the power of diversification. Traditionally, investments in shares used to be too concentrated in a handful of familiar stocks only. That created a huge risk in the event of a downturn. Especially, investors who stacked up their portfolios with tech stocks in 1999 or infrastructure stocks in 2007 paid a huge price in the subsequent years. Investors are now realizing that it pays to diversify and spread your risk. That also explains the big shift towards equity mutual funds where there is an automatic diversification due to a multi-cap portfolio. Remember, even the best of investors diversify and there is no reason for you to be an exception. That is a big lesson learnt in the last 10 years.
Investment is incomplete without monitoring
The best of strategies need to be monitored and periodically rebalanced. Monitoring has to be done with respect to your goals and also with reference to the current environment. Are the P/E valuations becoming too stretched? Do I have enough liquidity in my portfolio to take advantage of opportunities? What happens if interest rates go down? How do I benefit from a strengthening rupee? These are the kind of questions that investors need to simulate on a continuous basis with reference to their portfolio. These are the questions that investors are now beginning to ask either to themselves or to their financial advisors.
One of the reasons there is wealth creation in the markets at an investor level is because people have actually learnt the basics of investing better. In the past, it was these very basic lessons of compounding, diversification and risk that were being missed.