How to make your money grow

We start investing in a small way and slowly and steadily we build a good corpus, but all this was not easy. We might have burnt our fingers on the way. If you had taken the help of a financial advisor the journey would have been less painful. Never the less, we have to learn and that is the only way to grow.

First thing to remember is always invest in an asset class based on your goal and time horizon. Many people I have met, just invest based on the past returns of a particular asset class. All asset classes have their own ups and downs and nobody can say for sure, when is the right time to invest in a particular class of asset. Some like gold, others like fixed deposits and others like equity. But investment in a particular class of asset should always be based on goal and time horizon. It should not happen that when you actually need the money, the market for that particular class of asset in which you invested is down.

Next to remember is when it comes to investment you need to have discipline. Do not go by rumors or market movements. If you have invested with a particular time horizon and nothing has fundamentally changed, stick to your course.

For those who are risk averse and prefer FD’s, please check the credit rating before investing. Many companies give interest which is higher than the market rate of interest. They are ready to give those rates as nobody else is ready to give them money. Go for AAA rated fixed deposits only.

Always have a plan for your investments. If you do not have a plan you will find it difficult. Before you start your investment plan, make a contingency plan, basically your investments plan should not be derailed just because of some untoward incident. So get your insurances in place, be it health or life or even house. Any plan made should take into account taxes. What is the point of making money and giving most of it away in taxes.

Last but not the least, monitor your investments on a regular basis.

Asset Allocation

If you look at any smart investor, s/he follows these 3 strategies

1)     Asset Allocation – Smart investors do not put all their eggs in one basket. The allocation of funds to different asset classes is based on his/her risk profile and time horizon.

       2)     Differentiation between risk and reward – Wherever the risks are more than the rewards they avoid those     investments.

3)     Discipline – Once a strategy is devised they follow it, till the goal is achieved. This does not mean that they will not review the strategy. Strategy is reviewed periodically and not daily, even this review is done in a disciplined manner.

Let us look at asset allocation. Asset Allocation is a strategy where investments are done in different asset classes so as to balance the risks and rewards. Depending on the risk profile an investment portfolio is designed to diversify the risks and increase the rewards. As you are aware, each asset class has a different market cycle and the time frame for each cycle also varies, but we will never be able to time the market, so the next best thing to do is follow an asset allocation strategy and follow it. This discipline will help you get better returns.

Historically the major investment asset classes are real estate, Gold, Equity and debt. But Investment in real estate requires high investments, for doing asset allocation with real estate would be difficult, unless you have a lot of money. In that case we usually do an asset allocation between, gold, Equity and Debt. As you know each of these assets moves up or down at its own market cycle and we know of the market cycle only as an historical fact but not on a day to day basis. As market conditions change the risks and returns of the asset class changes, so by asset allocation you tend to reduce this risk. But how do you make money by just reducing risk. This is the second part of asset allocation i.e. rebalancing.

In rebalancing what we do is at every periodic interval we rebalance our portfolio. What does this mean? As time passes, one asset class would have given better returns than another. So if initially we had decided to invest Gold, Equity and debt in the ratio of 5:50:45 and at the end of the period the ration becomes 6:55:39 then we will sell some equity and gold and invest the same in debt to bring the ratio back to 5:50:45. This way you sell when the market is high and buy when the market is low for that particular class of asset. If all this sounds difficult, just go for a balanced fund which will keep doing this for you.