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Steady investment and magic of compounding

ANYTHING done with a sense of discipline and commitment will not yield the desired result. Same applies if you want to achieve “financial independence” in your life.

The key is to invest at regular interval irrespective of the amount [whether big or small].

We often wait for an opportune time when we are expected to have accumulated a sizeable or call it a respect
able amount in order to make investments in the instruments of our choice.

My experience indicates that such opportune time never comes and as a result most of the time we fail in our savings pursuit during the lifetime.

On this I remember a famous saying which states that - ‘tomorrow never comes’ and this literally applies to the subject matter in hand.

By taking a cue from the above statement one needs to comprehend two important things in order to achieve the goal of attaining self-sufficiency in financially matters.

The first thing goes with the discipline, which on our part necessitates the creation of savings or a disposable surplus consistently which in turn have to be taken up for onward investments.

The second equally important element is to determine the quantum of a disposable surplus.

Though there is no clear cut parameter for a person to gauge what is a perfect size able or the so called respectable amount as needed for investment.

How ever one needs to understand that a beginning can be made with any amount in hand, howsoever small it may be.

The phrase –‘small amount’ is a quite subjective term which again differs from one person to another.

For someone 5m/- may fall under the category of a small amount, while for another segment it may be a
very big amount to invest.

So depending on one’s income as well as expenditure levels, we can easily comprehend the quantum of investable surplus which is required to be created for onward investments.

Having discovered an easy answer on the quantum of one’s investable surplus, the next equally difficult question [as it appears] is to determine the periodicity or what do wemean by the phrase - regular interval.

This again depends on many factors e.g. for a daily wage earner the periodicity needed for savings/ investment can be taken on a per day basis, while for a regularly employed person the same could be on monthly basis.

Similarly for a farmer, such interval will be determined based on the nature of crops he/she is growing and the
timings i.e. when of its output ready for sale, which may lead us to an interval of quarterly or half-yearly basis.

When we apply the same principle to a business entity, this periodicity may finally drill down to be on yearly basis i.e. this is when the entity finalizes its annual accounts and arrives at a surplus or a deficit [whatever
the case may be].

A disciplined approach of investing small amounts at regular intervals can be achieved by joining various kinds of ‘Systematic Investment Plans [SIP’s]’ as prevalent.

Some notable examples of ‘System atic Investment Plans’ are as follows: (a) Savings accounts with banks
(b) Recurring deposits with banks (c) Postal Savings Schemes (d) Monthly Income Plans [MIP’s]
(e) Open end ‘Collective Investment Schemes’ (f) Regular Saving Schemes operated by Community Banks
etc.

By making savings/investment at regular interval, one is privy to an important advantage of getting ‘averaging of returns’ on their investments, as average rates of returns are averages of periodic percentage returns.
We all know that the move ment of most financial markets is quite cyclical as well as un predictable and thus one may end up timing its investments wrongly.

However, the impacts of such adverse market move ments can easily be warded off, if one adopts a disciplined
investment approach.

Investments made at regular intervals make the volatility in the market work in your favour, as over a period of time these market fluctuations are generally averaged out.

Moreover it is a proven fact that over a time investors who had followed a disciplined approach are the ones who normally reap the ‘maximization of returns’ on their investments.

Even in a downward spiral market trend, these are the same category of investors who are impacted least.

This is due to the application of ‘averaging of returns’ principle on their investments.

Additionally this approach will also derive the benefits of ‘Magic of Compounding’ to the investors, as this is one of the potential ways to magnify your small savings into a size able amount.

The ‘Magic of Compounding’ is a wonderful tool and I promise to do justice with this subject by writing an exclusive article on it in the days to come.

Remember, financial planning is not about having financial expertise and intense hardwork.

Similarly you don’t have to match the calibre of Warren Buffett to determine – when,
where and how to invest.

All it needs is the right approach and a bit of discipline.

So take the first step now by investing small amounts at regular intervals, which I am sure would lead towards
the fulfilment of your dream of achieving ‘financial independence’


 

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Author: Jagjit Singh

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