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Three Golden Rules to follow to fulfill one's financial plan

 

One's you sat down and set some goals for yourself .That's a good start but when do you plan to bgin investments to realize those goals. Are you waiting for the stock amrket to correct befor you put in your money? If yes,then do you know when the downslide is likely to happen? Only if you own a crystal ball and know how to use it. Then maybe you would! A lot of individuals who are looking at investing in stock market, time their entry (i.e. buy shares) or exit (i.e sell shares ) ,depending upon market movement. Ideally, one should enter the market when it is at lower levels and exit when it is at higher level. But the same is possible only if one can predict which way the stock market is going to move. The fact remains that it is almost impossible for anyone to consistantly predict the direction of the markets.

 

The phrase " Timing the market " is often repeated one but it is virtually impossible to do so. ' If timing the market is impossible ' ,then how does one know when to begin investing ? Samrt investors follow three golden rules :-

 

Golden Rule 1 : Invest regularly . First invest a portion

 

Investing regularly no matter how samll the amount. This will reap greater rewards in long run than investing larger sums occasionally .Instead of waiting until you have a lump sum it's better and easier to invest smaller sums regularly.

 

Two friends Rahul and Siddharth both start working at the age of 25 years. Rahul is serious kind and begins saving when he turns 30 and invests Rs 4000 every month,

     

He earn 10 % every year and regular with his investment for 10 years. After this, due to crisis, Rahul is no longer able to put aside any money. But he also makes sure that he does not touch the money already accumulated This money continues to grow at 10%. When Rahul turns 60, his investment grows to Rs 56.61 lakh

Rahul

 

Manish

30

Starts investing at the age of

40

10

Invest for (years)

20

10%

Investment return per annum

10%

4000

Investment per month (Rs.)

4000

56.61

Investment value at age of 60 years (Rs Lakh)

30.24

Manish is fun loving " live life to the fullest" kind of person The thrill of earning his own money and being able to spend it the way he wants resulted in him spending all his money on randed clothing,eating out, and couple of holidays.At age of 40 he realised that he needs to begin investing for retirment. he begans investing Rs 4000 per month for next 20 years. assuming a return of 10% he manages to accumulate corpus of Rs. 30.24 lakh.

When comparing above table , Rahul contribution of Rs.4000 for 10 years amounting to Rs 4.80 lakh will become Rs 56.61 lakh .on other hand Manish contribution of Rs 4000 for next 20 years amounting to Rs. 9.60 lakh will become Rs 30.24 lakh. This is simply the resutl of " Start Early " and " Power of Compounding"

 

Golden Rule 2 : Invest higher amounts. With rising

 

As one's income goes up , its obvious that one's annual/monthly saving should increase proportionally .The hard part is acquiring the habit of savings . Ideally one's investment amount should be set aside as soon as income generated. With the increase in the income of an individual , the amount put aside every month for investment purpose should be stepped up too. Make Investment your first priority not last . In most cases we spend first from Income that we earn and then whatever is left goes into saving

however this result in ad hoc saving pattern and often impulsive spendings.i.e. spending on goods and services which we may not have spent on if we had stopped to think about them.

 

Instead, we we make a commitment to save a certain proportion of our income every month , it becomes an effortless habit and goes a long way towards creating a corpus of funds for the future :-

 
 

Golden Rule 3 : Invest at an optimal return . One

 

All of us would love to get the highest possible returns on our investment. However ,higher returns means higher risk and vice versa . But what is not understood is that high risk can also translate into a situation of no return or even negative return. The pyramid approach is most prudent one in financial planning .It is wise to remember that a top heavy pyramid crumbles When one is younger ,the capacity to bear risk is higher and yound investors should take advantage this to put their money in investments that would give optimal returns.

 

Investments in low risk options like bank deposits, liquid funds etc.

When one is young , retirement seems very far away, but it still need planning. The is that you are young enough to take more risk to reach there .so this position consists high-risk, high-return investments such as equities, equitt funds and real estate.

       

Investments in medium risk options like debt instruments like debt funds, balance funds, company deposits etc.

Though riskier than those at the base,these investments give that additional kick to portfolio. Your future plans of buying a house or educating your children will be because of these investments. Investments in debt and balance mutual funds,long- bonds and corporate deposits with high credit risk rating. The idea is that you can little more risk when you are still some distance from your goal.

       

Investments in high risk options like direct equity, equity mutual funds, and real estate

This is where all your security rests. It must house liquid investments,which give you but predictable returns.Bank deposits and money market/liquid mutual funds qualify. These assets are meant to take care of uninsurable contingenies and meet your

 
 
 
 

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