We believe that the best way to channel savings into appropriate investments is to set up systematic investment plans. There is a misconception about such plans; many individuals relate systematic plans to periodic investments in mutual funds. That is not true. Systematic plans simply refer to the process of systematically investing your savings. In this article, we discuss how you can set-up such plans on all asset classes- stocks, bonds, commodities and real estate!
Systematic plan- Equity and Bonds
You can invest directly in equity or buy units in mutual funds. You can set up systematic plans on your direct equity investments through your online brokerage account. There are, for instance online portals which offer a facility where you can buy shares every month for a specified value. You can, for instance, set aside Rs 10,000 every month to buy shares of, say, BHEL. You should set up such systematic plan every month on not more than 5 stocks. It would help if your broker allows you to set up an automatic debit to invest the money every month.
Setting up systematic plans on your mutual fund investments is easy. You have to simply give the appropriate instruction to the mutual fund company of your choice. Be sure to check if your investment application is registered as direct; otherwise the mutual fund company will charge you higher fees on your investment!
Systematic investments on your bond investments are no different. You already have a default systematic investment running on your retirement portfolio- your provident fund account that is funded every month from your salary. To this, you can add a systematic monthly plan on your public provident fund (PPF) account. And to complete your bond investments, you could also have a monthly recurring deposit in a bank of your choice.
Systematic plan- Real estate and commodity
You may be wondering as to how you can set up a systematic plan on real estate and commodities. Remember, a systematic plan is one where you periodically channel your savings into appropriate investments. Suppose you take a home loan to buy a house. Your equated monthly installment towards repaying your home loan is your systematic investment in real estate! What after you repay your home loan? You can choose to buy another house if you can afford the down payment or you can buy a piece of land using a bank loan. Either way, repaying your loan every month helps you build your equity in the real estate.
What about commodities? Consider gold. You can set up systematic investments on gold ETFs through your online brokerage account. Some of you may also be investing in physical gold through local chit funds. We believe that financial gold (ETFs) is better than physical gold because the latter has associated storage costs. We do not recommend investments in other commodities for a simple reason- your primary exposure in commodities such as crude, silver and copper will be through the futures market. And since these are short-term leveraged contracts, the associated risk is high. You should invest only if you have the time and expertise to manage the associated risk.
Conclusion
We insist that you set up systematic plans on all your preferred investments! While systematic plans are beneficial for all working executives, those who have just started their career would find the process more useful. Systematic plans offer you a simple and effective way to overcome investment inertia; it systematically channels your monthly savings into appropriate investments. There are two rules that you need to follow. One, as far as possible, set up the systematic investment through an auto debit instruction on your bank account. And two, operate a separate bank account for your investments. Every month, auto-transfer your total savings from your salary account to your investment account. Your systematic investment plans should be set up on this investment account.
( The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent toknowledge@thehindu.co.in )