Vanya (27) has been working for the past two years. Her in-hand monthly salary is about Rs50,000. She is currently living with her parents and has no major responsibilities. While Vanya has accumulated a corpus of Rs2.5 lakh in her bank account, she is afraid of investing it. Although she initially planned to embark on her investment journey in 2020, the pandemic-led market fall scared her away. Later when the market started recovering, she thought she would enter the market at the opportune time. However, owing to the unending market rally, her wait has been like forever. She seeks our guidance.
The right time is now
Volatility is the inherent nature of the equity market and hence, there is no good or bad time to start investing. If one keeps waiting for the correct entry point to enter the market, this wait can turn out to be endless, as no one can tell where the market may move. Thus, the best time to start investing is now.
In investing, the more you delay, the less wealth you will be able to generate over the years. See the graph titled 'The price of starting late' to understand the power of compounding with time. Remember that the time in the market is more important than timing the market.
The right way to get started
Even before you start your investment journey, the first and foremost thing to do is to decide your investment horizon and goals. Select your investment avenue based on your investment time period, the purpose of your investment and your risk appetite. So, make sure that you define your goal first and then, choose your investment avenue. For instance, for a goal with a time horizon of three to five years, you should invest in short-duration funds. On the other hand, for your long-term goals, a portfolio of three-four diversified flexi-cap equity funds will be good enough.
As a new investor, investing your entire portfolio in equity can be unnerving, especially if the market witnesses turbulent times. Hence, you should start your investment journey with an aggressive hybrid fund. These funds invest about 65 per cent of their assets in equity, while the rest in debt. The equity portion helps in generating returns, while the debt portion helps cushion the downside if the market witnesses a correction. Thus, these funds tend to fall less than mainstream equity funds and provide psychological comfort to investors (see the graph 'Cushioning the downside').
Ignoring the noise
Warren Buffett says, "Successful investing takes time, discipline and patience." This is often easier said than done. Market volatility often gives investors sleepless nights, making them anxious and prompting them to make wrong decisions, such as not investing at all or redeeming when the market suffers correction, which ultimately make their losses permanent.
If you look at the daily movement of the equity market, it will give you the jitters. Once you define your goal and investment horizon, make your investments, irrespective of the market noise. The market tends to move upwards in the long run and reward patient investors, irrespective of the short-term volatility.
Also, a staggered entry into the market through SIPs is the best way to invest in the market. Avoid making lump-sum investments, as there is a chance of catching the market at a high. Spread your investment amount over a few months.
First things first
- Emergency corpus: Create an emergency corpus equivalent to at least six months' expenses in a combination of a liquid fund and sweep-in deposit.
- Life insurance: An adequate life cover is a must if you have financial dependents. For this purpose, consider pure term plans only.
- Health insurance: Apart from the health insurance provided by your employer, you should have one independent policy as well.