Let us start by understanding the three basics to achieve financial freedom: Saving, Investing, and Growing.
To be a smart investor, you must first understand the value of your earnings. When you value what you earn and feel content with it, you will start saving. Any amount of money you save is valuable. Thus, start with determining the amount you wish to save. It can be as low as 10% of your total earnings, but ideally, it should be at least 1/3rd of your income.
But does a seed that you have sown grow on its own? It does not. The same goes for your money as well. When you save it, and you do not invest it, it stays where it is.
However, ensure that your saving amount is defined before you begin spending. This way, you will cut down on your unwanted expenses.
Investments should be made after understanding one’s risk appetite.
Let us suggest one easy way to save and invest:
As you know, a mutual fund is subject to market risk. Therefore, it is ideal to start investing in equity mutual funds through the SIP route. A SIP not only allows you to begin investing with a small sum but also diversifies risk across bull and bear phases in the market.
Investing through SIPs
A Systematic Investment Plan or SIP allows you to invest as low as Rs500 in a mutual fund scheme at fixed intervals.
Investing in SIP is the easiest way of starting achieving financial freedom in the long term. Moreover, mutual funds are one financial instrument that let you withdraw your money when you need (except for a few schemes that have a specified lock-in period).
When you invest, your money works on a compounding principle, i.e., returns earn returns and the principal starts to grow automatically. For first-time investors, mutual funds are the best financial instruments to invest in.
Here’s an example that justifies the power of compounding.
Here, we have three investors who started investing at different stages in their lives and with different amounts. Still, the investor who invested the least amount reaped exponentially higher returns compared to the other two. Why? Because he gave compounding the time it requires to work its magic.
|Age||25 years||35 years||45 years|
|Tenure||30 years||20 years||10 years|
|Total Amount Invested||Rs18 lakh||Rs18 lakh||Rs18 lakh|
|Expected Rate of Interest||18%||18%||18%|
|Amount at Maturity||Rs7.16cr||Rs1.75cr||Rs50 lakh|
Investments should always be goal-based. Depending on your goals, you decide the total amount of money you need and the amount of time you can give that goal to materialize. While deciding what scheme to invest in, an investor must also look at its historical returns.
Growth is the outcome of your continuous saving and investing efforts. In order for your wealth to grow, you must save, invest, and repeat. This possibly is the most definite, and the most disciplined approach to achieving financial freedom.
The term ‘growth’ investment can be confusing for many. This involves picking companies that invest all their earnings in growing their business. They also invest in growth-oriented products which are designed to maximize capital appreciation and are able to generate high returns. But what goes around, comes around. So growth investments have the potential to increase in value, and this means that they can also decrease in value. Hence, they are riskier as compared to other investment methods.
Markets will always be volatile. Keep in mind the various factors that can affect your investments, but do not panic. A drop in the value of your investment does not necessarily mean that you have lost your money; you could use this opportunity to buy more, or just adopt the ‘wait-and-watch’ method. Things will eventually turn around.
Above all, stay committed and disciplined about saving and investing if you want to grow your way towards financial freedom. Happy Independence Day!