- Why to automate your investments
- How to automate your investments – Step-wise guide for 2019
Why to automate your investments
Updated: 27th January 2019
In current times of apps and progressive websites, it is easier to invest at click of button and you can do it at your convenience. The question that comes to mind is: Why to automate at all? Why not to buy at right time, rather then leaving the investments on auto mode?
When you automate your investments, it removes the bias, impulsive decisions & procrastinations from your investment decisions. Your pre-decided investments is done. No guesswork, no delay. It is done on auto pilot on regular basis. According to your designed and planned financial plan.
In other words, it is connected to this reason too, is mental attention required & emotional stress that happens when you are planning to invest.
You see, when you read about people who made money with their investments over the time, you get all charged up. But when the time really comes to issue the cheque or make the online transfer, you mind is filled with doubts.
- Is it the right investment?
- Is the time right? I might be buying it at a high and then I will repent when market falls?
- Should I be investing this much? Or do some part today and rest, maybe, next week?
And so on.
It is not easy. If it was, then you would not have seen such low penetration of investment avenues in retail market.
Hence the main reason of automating your investments. You set it up, and it takes care of your investments.
How to automate your investments – Step-wise guide for 2019
Step 1: Listing your goals
Before you install any app or open any account, the first thing is to set up your goals in financial terms.
These goals are to give an idea about what you want to achieve financially. It is based on your requirements as well as desires.
This listing is supposed to be simple. It is not a detailed financial projection based excel sheet.
A simple understanding to know what are you expecting out of your investments.
On side note, this list can also help you describe your current risk profile.
With a good look at your priorities you get to know how you should plan your investments. This is important because not all the investments are suitable for everyone.
Let us understand this with a small example:
When you are new to job and just start to earn, the idea about buying yourself a good car & a home down the line is more important than planning for retirement.
Rather than planning for retirement at this stage, you should be thinking about having an emergency fund.
This is important as you don’t have assets to back you up.
Same planning will be quite different, if you have strong enough financial background. In that scenario, the investment are mainly planned for wealthy generation purposes.
Understanding & knowing helps you a lot in planning right investments for yourself.
Step 2: Checking out investment choices
As this guide is for people who are beginning their investment journey, I am listing effective & simple to invest choices here.
Fixed deposit or FD, as the name suggests is a fixed amount deposited with bank for fixed duration.
As the bank knows that your deposit is with them for certain duration. This allows bank to give your higher interest rate for such deposit. Higher than your regular savings account.
Thus, where normal interest rates on savings accounts are 4-6%, interest you get on FD are in tune of more than 8% per annum. Higher your time frame, better is the interest rate provided to you.
The caveat here is that, if you withdraw your amount before the term of the FD ends, then the bank penalises you and thus you get less return as compared to holding the deposit for full duration.
The interest generated on a FD is chargeable to tax deduction at source.
Recurring deposit or RD as it is famously called, is an regular investment plan available at nearly all the banks.
As per Wikipedia entry:- “RD is a kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits.
Which in simple english translates that RD are Fixed Desposits (FDs) available on EMI.
Public Provident Fund(PPF):
PPF is a type of savings cum tax savings account offered in India. It is a 15 years scheme and the account matures only after 15 years. Premature withdrawal is not allowed with PPF.
The interest received on the account is completely tax free.
The other similar version is EPF ( Employee Provident Fund), which is regulated by EPFO. The difference here is that in EPF a percentage of your investment is matched by your employer.
Mutual funds are grouped investment schemes where a professional fund manager manages a pooled investment fund. These funds are regulated by SEBI, AMFI guidelines to protect investors interests.
Contrary to popular belief, Mutual Funds are not designed to invest only in stock market. There are debt funds, fixed income funds too, where the main purpose is to invest in gilded securities for growing your money.
If you lack time or necessary skills to research for investments yourself, then mutual funds provide good enough returns with right exposure to stock market.
There are many mutual schemes in market, hence I have compiled a list of best mutual fund according to requirement in this detailed guide.
This investment class is for advanced investors only. This guide is related to automating your investments using above mentioned investment choices only.
The reason is not because beginner’s can not invest in stock market. You can learn to invest in stock market, buy you need to learn about it. The reason is that, unlike above mentioned investment vehicles, here you are mostly on your own.
Which means you need to understand on what basis you are investing in any stock.
When you purchase shares of any company listed on stock market, it makes you a shareholder in that company.
Thus, you need to research a company to decide where see the growth potential of that company.
If you are interested in self educating yourself about investing in stock market in India, you can use this guide as well as sign up for our investor newsletter to receive bi-weekly market research.
Step 3: Divide your investments among choices
Once you have your goals and investment choices listed, you have a fair idea how much return you can expect from each of the choices.
There is a simple rule, investments which are guaranteed provide less return. Sometimes even less than the rate of inflation.
Hence, you need to divide your investments among choices mentioned above. This was you get tax benefits in some, safety in others and higher returns in rest.
But before that a single detail about emergency fund
Emergency fund as the name suggests is for emergencies only. There is not definite figure about how big an emergency fund should be, as no emergency comes announced or with a prior cost.
What I have seen is that having anything more than 2 months of your monthly expenditure is good enough point to start with and upto six months of expenditure is where you should grow it upto. Anything more will be an overkill.
Don’t focus on building your emergency fund only. Start with making it a priority, once the base number is done. Make it a part of your investments and then once upper target is met, shift your complete focus on investments only.
Now that selection has been made, it is time to automate. Few of the investment choices can be set up on apps these days, which is explained below. But there are few, which need proactive work. These are the ones we will automate first.
The first feature is now available on most of banks. You can set to Auto Debit certain amount from your account to any investment on regular basis. This works very good on RDs.
It is the timing that matter most. The best time and least bothersome too, is right on the day when you get your salary credited to your account.
What you need to remember is: Don’t put too much into the tax savings or low return fixed deposit schemes.
This may sound counterintuitive, but when you put money here, you are also losing out on opportunities to create wealth by investing in high growth avenues.
SIP ( Systematic Investment Plans)
SIP is again an auto debit based investment in Mutual Funds.
While signing up to purchase units of a Mutual Fund, you also mention the amount that you will invest each month.
These days it can start as low as Rs. 500 /- per month. Which is nearly equal to a movie ticket these days. Imagine that! Skip one outing a month and your investment is done.
The best part here is that you can subscribe, check you portfolio on your mobile app. No need to visit branches of the financial services firm and then sign up those huge forms. Most of sign up these days are 100% paperless.