Why generate an investment rulebook

You need to establish an order that allows you to lead an everyday life. The role of money in your life cannot be understated.
The role of money in your life cannot be understated.
The role of money in your life cannot be understated. Mandar Pardikar
Updated on
3 min read

India completed 75 years of being a Republic on Sunday. It was no mean achievement for a country that pundits predicted would fail in the 40s and 50s. All stakeholders must follow the Constitution as a guidebook regardless of political ideology. Despite multiple differences, there is a relative public consensus that we have to function as a democracy and follow the laws in the written Constitution.

Imagine your life as a chaotic place like India in 1947. There are problems galore. Unlike the situation then, the risks to your life are low. However, you know that you need to take control of it. You need to establish an order that allows you to lead an everyday life. The role of money in your life cannot be understated.

The root cause of disruption in life is related to your finances. They may not aligned with your life goals. But you know your future depends on how you handle your income and expenditure. You also know that your savings and investments require a rule book you agree to without grumbling.

The reason to flag that concern as we celebrate 75 years of being a Republic is due to the churn you do with your mutual fund systematic investment plans. Almost 90% of the SIPs that power the Indian domestic investment into the stock market are withdrawn within three years. There could be several reasons for that.

First, it could be a loss of income. There is a possibility that you do not have the money to continue making that commitment any more. That could lead to the snapping of fixed commitments like SIPs every month that are meant for the future. Your state of work may look uncertain now, but it is unlikely to remain like that forever. You will find work sooner than later.

Rajas Kelkar
Rajas Kelkar

The lesson to learn here is that you cannot stop investing no matter what. You can scale it down, but continue to invest. You can always step up as you regain your income. You must ensure that your commitments are manageable even if you suffer an income loss in the short term. That requires astute financial management. A professional advisor can help you with managing your finances appropriately.

The flexibility mutual funds offer today is such that there is little room for an excuse not to continue. The Securities and Exchange Board of India (Sebi) published a consulting paper last week about micro SIPs like a product sachet. You can invest as little as R250 per SIP. The idea is to encourage people to save and invest long-term.

The second reason for you to snap your SIP could be associated with your fear of loss and your perception of the risk associated with it. Regular investments into exchange-traded index funds or mutual funds are meant to beat the highs and lows in the market. The risk factor comes into the picture if you seek to time the market. If fund managers with knowledge, sophisticated data, and technology at their disposal struggle to beat the market consistently, then you are unlikely to succeed as a lone ranger without adequate knowledge.

Your rulebook for investing should involve a process to automate your monthly investments. You can break them into long-term and short-term investments. Your rule book should stall any idea of touching the money deployed in long-term investments. These could be your provident fund pension funds or SIPs for retirement or a child’s education. Your money needs time to grow, like any tree that eventually bears fruit.

The power of compounding works for you if you let your money plant grow into a tree that can bear those fruits.

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