Investments should accompany ambitious goals

I came across several investors who just dump their hard earned money into the mutual funds or stock markets just because they are fascinated by the huge returns they see from the mutual funds in the previous years. Be it the advise from friends, or from the agents, people should now realise that the investment they put into the market should always have a goal behind it.

The recent crash in the stock market should have taught a lesson to all those who invest with greed just wanting the returns without even being aware of the risk that is involved with equities. It is not with a sense of hatred or anything of that sort i utter these words, but only to educate those who fall a prey to this bad quality called greed. I have seen friends investing in the market for achieving goals like buying a car, for the sake of higher education of their children and anyother achievable and meaningful goal. They are correct and everyone should have a goal predetermined before putting their money into the stock market. Few things that should be decided before investing are :

• Decide the purpose for which you are investing
• Choose a reasonable time frame. Expect reasonable returns.
• Choose good quality funds or stocks to invest.
  
• Stay invested long for term.
  

Every investment that come into the equity, either stocks or the mutual funds, should have an ambitious goal behind it. Similary every investment should have a timeline predetermined along with the goal. At the same point, do not be over ambitious as well. After all, you cannot expect to be a crorepati in a span of 2 or 3 years. Expect reasonable returns and invest in well chosen and good performing funds.

Mutual Fund Identification Number (MIN) and KYC

Mutual Fund identification number (MIN) and Know your customer (KYC) are the methods followed and deployed by AMFI. They are applicable for investments exceeding 50,000 Rs.

The mutual fund Identification number (MIN) is now discontinued and the new KYC process is put in place. It is applicable for one time investments that exceed Rs. 50,000. KYC stands for know your customer. These processes are put in place to prevent illegal money flowing into the stock markets by anti social elements.

From now on, whoever wants to invest amounts bigger than 50,000 at one go should adhere to these processes.

The power of compounding.

Ever heard of this saying?

"It is not timing the market that is important, but the time spent in the market"

If you try to understand the principle behind this..it is nothing but simple mathematics!

Under the core of investment principles, there is one important strategy that illustrates the best method of generating wealth over long term. It is nothing but the power of compounding!

The longer the time you stay in the market, the better the returns and the wealthier you are!!

To be simply put, the earlier you start investing, the better off you are at the end. Start investing early and you cannot even believe the number you can achieve. It all lies in the simple principle of compounding. It is better illustrated using the table below. The table illustrates two different scenarios where person A starting investing earlier that person B. However, it is an assumption that the rate of return in both the cases is 10% p.a. Whether the number shown is achievable or not is out of scope of present discussion.

Scenario 1:

Person A started investing from age 20 with a monthly investment of 1000. By the time he attains 40 years of age, the corpus he might have build with a 10% return is as shown below.

Monthly Investment : 1000

Amount invested per year: 12000

Rate of Return (assumption): 10% p.a.

No. of years invested: 20

Total corpus at the end of 40 years (Person A's age):

RS. 756029.9933

You can also notice in the above picture, the way the returns and the wealth builds up over a period of time.

Let us see another scenario where person B starts investing from age 30 (10 years later than person A). He invests the double the amount per year when compared to personA. Let us see the wealth he is able to generate.

Person B:

Monthly Investment : 2000

Amount invested per year: 24000

Rate of Return (assumption): 10% p.a.

No. of years invested: 10

Total corpus at the end of 40 years (Person B's age):

RS. 389623.0999

If you carefully observe, even if person B invests twice the amount than person A, he is able to build only around 50 percent of the wealth that person A is able to generate. This itself iterates the fact that, it is the time you spent in the market that matters and not timing the market.

Moral: Invest early to generate maximum returns. Spend more time in market through disciplined investing.