Investing with very little Money : Everybody you meet in your daily life, is fighting their own battle. And the biggest bitter truth of human lives – We generalize things as we look for pattern in everything. You need to understand that you are running your own race, not others.
Time – This does not mean how much time you have left with on this planet but what i meant, how much time you are going to work and invest to build a retirement corpus for yourself. In India, people work until 60–62 year of age max (Provided you do not belong with business category). But if you have any source of passive income – you can even invest after 60–62 year of your age.
Before i proceed and make you understand with some examples – Let me tell you that I have started investing with very little Money in my SIP investment at age of 32, so you are not alone. 😉 I was running my own race – with family responsibilities. So, be on your race there.
I am not going to explain what is SIP and how does it work? But think about it, you save a certain portion of your monthly salary and invest it every month through SIPs. This essentially means that your savings are used to buy mutual fund units on a particular date every month. What you are simply doing is saving every month through SIPs.
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Here are those 5 tips i personally follow, to turbo charge your SIP (monthly investment) returns:-
Tip to investing with very little Money
- Opt for always Direct Mutual Funds –This is perhaps the simplest one to implement. Direct funds will straightway give a boost of 0.8%-1% (annually) to your returns. ‘Mutual Funds Sahi Hai’ – probably the most popular tagline these days, isn’t it? But nobody tells what to do and what not. Now, you may also come with regular SIP plans with distributor/adviser but they are going to charge commission from you certainly.
- Start investing with very little Money early with your SIP investment plan – This is very important. If you are looking to build a retirement corpus with your mutual fund investments, starting investing with very little Money early is extremely important.
The earlier you start investing with very little Money, the more time you give your investments to compound. And compounding is simply awesome. You can’t imagine what it can do for your wealth creation.
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Compounding basically means investing with very little Money back the returns generated by an investment. This return generated is added back to the principal and then the investment generates further returns on the enhanced principal. This is a very powerful concept and can over time turn even small sums into very large sums of money.
If you are Mr. A and starting investing with very little Money in your investment journey late by 10 years (lets say), create a source for continuous passive income and keep investing even after your retirement. Simple is that.
- Select the best mutual funds for your SIP investment plan This sounds almost like common sense. And it is. If you select the best mutual funds, you will get the best returns.
But the harsh truth is that most people get it wrong. They think that they are opting for the best mutual funds. But they are not.
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If you are using star ratings on websites as the criteria for selecting your funds, you are doing it wrong.
What you need is a framework for selecting the best mutual funds.
Investing with very little Money
- Segregation of funds into proper baskets before starting investing with very little Money the comparisons – no point in comparing a large cap mutual fund with a small cap mutual fund!
- Compares funds across many different timelines and not just one (we do this using rolling percentile return)
- Doesn’t just compare returns but also takes into account the risk that you would expose yourself to if for the returns
- Recent performance – if momentum is in favor of a fund, it is likely to continue doing well
- Focuses also on subjective parameters like – fund manager reputation, AUM of the fund schemes and how the fund has done during stressful periods like 2008 or 2020 (You know it, aren’t you?)
- Keep your portfolio optimized – The funds you select will not be the best funds forever. Make sure that you are always invested in the best mutual funds.
For example, suppose you select the best mutual funds as per the list above. Fast forward to year 2023. Do you think that the same funds will still be the best then? If not, why should you continue investing in them?
Portfolio optimization is fairly complex to implement. You have to actively manage your portfolio. Unless you have all the time in the world, better left for the machines.
- AI – Apply Intelligence Best for the last!
By applying intelligence (not artificial intelligence) to your SIP investment plan (and now we will start to call it something different), you can give a significant boost to your returns. Intelligence can be the real game changer for your investments.
This is going to be simple. Dig for historical patterns. Learn from those patterns and apply the learning to your investing methodology.
Let me give you an example here.
But before we look at the pattern, let’s just quickly introduce the concept of Price-to-Earnings ratio (P/E). PE is one of the most widely used metric to gauge market valuations (if the market is expensive or inexpensive or fairly valued). We will use the P/E levels of Nifty 50 index derived by dividing the Nifty value by the profit of its underlying stocks (on a per share basis).
What we will do is see how your returns would have turned out if you would have invested in NIFTY 50 index at different PE levels.
We will look at 1-year, 3-year, 5-year and 10-year returns. The data is compiled by using all trading days of NIFTY for last 20 years.
The way to understand this table is as follows:
Suppose you invested in NIFTY index on all days when PE was greater than 24 and held for 5 years. Then your average return would have been 2.5%. Also, there was an instance where you would have ended with a negative 1% return (worst case).
Similarly, suppose you invested at times when PE was between 14 to 17 and held on for 10 years, then on an average, your returns would have been 16.1% and the worst-case instance would have been 9.6%.
Now there is an unmissable pattern here.
As you move down the rows in the table, your return numbers (both average and minimum) keep getting worse. What does this mean?
Simple….if you enter the markets at higher PE levels, you are likely to end up with lower returns. And this is applicable for all holding periods. Just imagine this – if you invest in NIFTY at PE levels higher than 24, even for a holding period as long as 10 years, on average you would earn just 6.1%. That’s even worse than FD returns!
How to invest in stocks with little money?
If you have never invested before, it’s normal to have tons of questions, and to feel overwhelmed with all the information that’s out there.
Set Long-Term Goals-
Before investing you must know your goal and the likely time you may need fund in the future. Investing in stock market for a long term can result in good returns.
Make up for the misses-
Investing regularly requires commitment. All you need is to be regular and consistent. Saving a regular sum can make you profitable. If you could not save in the stipulated time this week, in the next week make up for it.
Understand Your Risk Tolerance-
Risk tolerance is also affected by one’s perception of the risk as by understanding your risk tolerance, you can avoid those investments which are likely to make you anxious.
Control Your Emotions-
You are bound to be emotional and overwhelmed when you first start investing with very little Money in stock market as earning good returns may make you happy but losing money may hurt. Learn to never make your investment based on your emotions.
Handle Basics First-
Take time to learn the basics about stock market and the individual securities composing the market as knowledge and risk tolerance are linked- risk comes from not knowing what you are doing.
Diversify Your Investments-
Investment diversification protects your money from adverse stock market conditions as when it comes to investing, it is advised by savvy money managers that investors must invest money in various asset i.e. diversify their investments. It protects from losing all assets in a market swoon.
Invest in Your Own Skills-
Again, this may seem like a no-brainer, but you should remember to play up your strengths. Find ways to increase your capacity to qualify for better jobs that will translate to better pay.
For instance, you might invest a few hundred dollars to acquire skills that will enable you to advance in your current field. You may also explore online courses that offer instruction in high-demand skills and services that you can then offer as a freelance professional to increase your income.
Take Advantage of Your Employer’s Retirement Plan-
Enrolling in your employer’s retirement plan is a simple step towards a good, lasting investment. You need to make contributions regularly. You can commit just a little of your paycheck to start investing with very little Money, then increase the amount gradually every year, at the same time you receive your annual pay increase.
Set Up Your Own Retirement Plan-
If you’re not under formal employment, you can still set up your own retirement plan through an Individual Retirement Account (IRA). Contributions to a traditional IRA are tax-deductible, and any returns on investment you earn are tax-deferred until you start investing with very little Money withdrawing funds during retirement.