Start investing early and systematically to let the power of compounding work

During a lifetime, you undertake major life events at regular intervals viz. children higher education, their marriage, your own retirement. In addition, numerous minor events and purchases also come along. All these require the availability of lump sum cash at specific times, which become your financial goals. If you do not give adequate thought to meet these goals, then you may find yourself at your wit’s end at critical life junctures. Literally, the troika is a Russian carriage pulled by three horses abreast. Accordingly, the troika of starting early, investing systematically and using the power of compounding can pull your investment carriage to its various destinations (financial goals).

Start Early – If you start saving immediately after you start earning, then you can save a smaller amount over a longer duration to meet your financial goal with your financial goal planner. Relatively, earlier on in life, one has lesser domestic and social burdens, which lends itself to saving. As one gets older, the domestic necessities and social obligations increase. If you want to save a retirement corpus of Rs 5 Cr, then you require to invest Rs 5,400 per month over 40 years, Rs 17,200 per month over 30 years, Rs 57,500 per month over 20 years and Rs 2.35 Lakh per month over 10 years to achieve it @ standard 12% interest rate. It is evident that the financial burden is much lesser if one starts saving early to meet his financial goals.

Systematic Investment – Discipline in life is the single most important habit that holds you in good stead through life’s vicissitudes. Inculcating fiscal discipline helps you to meet your financial goals and relieves you of avoidable stress. Understandably, lump-sum investment is not always feasible nor is it advisable due to market fluctuations and difficulty of timing the market. Most open market investments now provide a Systematic Investment Plan (SIP) facility, which works on rupee cost averaging. To achieve rupee cost averaging you continue to invest a standard amount of money at a regular frequency (quarterly/monthly/weekly). Therefore, your cost of acquisition of the units/shares comes down to be much lower than what you would have otherwise paid. This is one of the best methods to inculcate financial discipline and takes the speculation and guesswork out from the investment. Over the last 10 years, monthly SIPs in equity mutual funds have provided 13.84% returns per annum. This means Rs 10,000 invested every month would return Rs 23.02 lakh tax-free on a principal investment of Rs 12 lakh. On the other hand, an 8% recurring deposit would mature to Rs 17.38 lakh and a 10% deposit would mature to Rs 19.12 lakh with taxes further reducing these returns.

Power of Compounding – Albert Einstein had famously quoted, “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pay it.” One must also understand that shorter the compounding period better are the returns. If an investment house compounds 20% interest annually then at the end of one year he will return Rs 1,200 only over an initial investment of Rs 1,000. However, if the compounds it half-yearly (10% every six months), then after six months he will pay you Rs 1,110 and after a year he will pay Rs 1,210. Similarly, compounding it quarterly (5% every quarter) will get you Rs 1,215.51 after a year. This is Rs 15.51 more than the first instance where the investment house compounded the interest annually and Rs 5.51 more than half-yearly compounding interest. Therefore, start investing early and systematically, through SIP, and watch the power of compounding do the rest for you to meet your financial goals.

Let me explain this troika with the help of an Incremental SIP methodology. Factually, this investment technique takes into consideration that investor’s income increases over the years and so does his capacity to invest. Besides, this also hedges inflationary pressure on your accumulated wealth:

Stage I – If you start investing Rs 5,000 per month through SIP in an equity MF immediately after your child’s birth, then after 18 years (at the time of your child’s higher education) you would have invested Rs 10.8 Lakh. Assuming moderately, the MF returns a 12% interest on your investment during all stages, the fund value will be about Rs 33.44 Lakh. Either you may use this corpus partially or fully to meet your child’s higher education need for which a vast majority of Indian parents (up to 71% as per a recent survey by HSBC) are willing to take a loan. Suppose, you use only Rs 20 Lakh for this need and move onto the next stage.

Stage II – Now you increase your SIP investment to Rs 10,000 per month. After another 7 years or when your child attains 25 years of age, the aggregate fund value of your investment will be about Rs 41.84 Lakh. Supposing, this time you take a partial withdrawal of Rs 30 Lakh to cater for your child’s marriage and gift the balance of about Rs 11.84 Lakh to your child with a caveat that hereinafter he must continue the investment until his retirement to reap the benefits of compounding.

Stage III – Supposedly, during this stage, your child continues and increases the SIP investment to Rs 15,000 per month. Then, after another 20 years or when your child attains 45 years of age the aggregate fund value of his investment will be about Rs 2.43 Cr. This time your child may partially withdraw Rs 1 Cr to make a down payment for his new house. He makes the balance payment through home loan EMI to reduce his tax liability.

Stage IV – Your child now adopts a far-sighted financial strategy to continue his SIP along with his home loan EMI. Not only this, he prudently increases the SIP to Rs 20,000 per month. After another 15 years or on attaining 60 years of age (his retirement time), the aggregate fund value of the investment will be about Rs 8.77 Cr.

Addendum – Suppose, initially you and subsequently, your child decide to invest in an incremental SIP without making any withdrawals, then the fund value available to the child at the time of his retirement will be a whopping Rs 53.42 Cr.

Age of Child in Years No of Years of Investment Incremental Investment (in Rs) Fund Value of Investment (in Rs) Fund Value of Previous Bal Left Aggregate Fund Value (in Rs) Partial Withdrawal (in Rs) to Meet Life Event Expenditure Bal Left After Partial Withdrawal Accumulated Fund Value Without Withdrawal
(a) (b) (c) (d) (e) (f)=(d)+(e) (g) (h) (i)
0 to 18 18 1,080,000 3,344,983 0 3,344,983 2,000,000 1,344,983 3,344,983
19 to 25 7 840,000 1,210,681 2,973,329 4,184,010 3,000,000 1,184,010 8,605,373
25 to 45 20 3,600,000 12,969,440 11,421,308 24,390,748 10,000,000 14,390,748 95,979,389
45 to 60 15 3,600,000 8,947,132 78,768,706 87,715,837 0 0 534,296,628
TOTAL 60 9,120,000 15,000,000


  According to the third CFA institute investor trust study survey covering 3,127 retail investors and 829 institutional investors worldwide, 70% of Indian investors work with professional advisers compared to 54% globally; 81% of these began work with advisers in the past six years. Of these Indian investors, 31% investors listen to primary advisers, 30% depend on online research and 19% take advice from friends and family. The investor looks for someone who will act in their best interest and can achieve high returns. In another survey, sixth-annual Legg Mason Global Investment Survey (LMGIS), 44% investors with financial advisors feel that volatility is “positive – if managed properly” as against 27% without advisors. This indicates that investors with advisors are more likely perceive volatility as an opportunity. The chart below is reproduced from a survey report of IIMS Data works Survey and shows with whom would Indians trust their money.

Benefits of Financial Advisers

  So, what do the
financial advisors bring to the table for you? According to Accenture
Consulting survey report. “a human advisor (even if advice is provided
virtually) is still seen by a slight majority (51 percent) as the most reliable
option for new investment ideas. 57 percent of investors felt human advisors
(virtual included) provided the best customized advice.”

Decision Making – Financial
advisors assist you in objective decision making. Generally, an investor tends
to get emotionally attached with his portfolio. When the markets undergo
upheaval, he is liable to get swayed by the volatility and take biased
decisions. A good professional advice from his financial advisor will assist
him to arrive at objective and well thought through decisions. Moreover,
financial advisors come to you with experience, intimate knowledge of financial
products and market research. By virtue of their work, the financial advisors
are in touch with numerous wealth managers, investment bankers, mutual fund
managers and most importantly the common man to know the market sentiment and
its buzz. This makes decision making more holistic by avoiding myopic and
blinkered market view.

Diversification – They help you to diversify your investments. The financial advisor understands the importance of diversification as a means to beat the market volatility and thus helps you to stay on course to meet the financial goals. Statistically, as per the LMGIS survey, advised investors are better informed and more confident to diversify their portfolio into asset classes other than equities.   



Real Estate


Domestic Bonds






International Bonds


– A common DIY investor may not understand the taxation intricacies of various
financial instruments. Furthermore, taxation is a dynamic process and staying
updated regarding various facets is also critical. To make maximum gains, the
investor must know how to work around the taxation labyrinth correctly to avoid
paying taxes unwisely and coming under the taxman’s scanner.

Risk Profiling and Goal Planning – A financial advisor will put you through the paces of risk profiling and financial goal planning before suggesting investment options. This is the correct and methodical way of going about investment.  A DIY investor at times overlooks these important aspects and gets carried away to invest in a financial instrument that is marketed better than others even though it may not suit his risk profile or meet his financial goals in the given time frame. Financial advisors tailor your portfolio from a plethora of financial instruments to suit your risk profile and help you meet your financial objectives within stipulate timeframe.

ProfessionalismFinancial advisors bring professionalism to your investment management. In accordance with your risk profile and financial goals, they carry out annual or half-yearly portfolio reviews and rebalancing to minimize losses and maximize gains. Next, they track the markets continuously and advice you at opportune times to book profits or cut out losses appropriately through redemptions, switches or purchases.

Better Returns – The use of a Financial advisor provides you the opportunity to generate better returns. The chart below is made from a sample survey carried out in the USA where it was deduced that advised individuals had a minimum of 25% and a maximum of up to 113% more assets than unadvised individuals. This was possible since advised individuals stayed invested for longer-term and had properly diversified their portfolios.

How to Select a Suitable Financial Advisor

Qualifications and Credentials – Dime a dozen financial advisors are available in the market. This makes it difficult for an investor to choose the right man for the right job. To choose a financial advisor wisely, an investor must look for a Securities and Exchange Board of India (SEBI) registered investment advisor (RIA) who preferably is a certified financial planner in jaipur (CFPCM ), which is mark of excellence granted to individuals who meet the stringent standards of education, examination, experience and ethics. Since the agents represent few companies, they can sell products of only those companies. Market Regulator SEBI feels the need of segregating distribution and advice and is moving in this direction. Stoppage of upfront commission for agents, fee-based Financial advisory services and trail commission-based distribution agents are some the regulatory norms being brought about by SEBI. This will protect the investors from commission-driven agents who tend to offer biased financial advice to secure a maximum commission.

Experience and Reputation
– A post graduate in finance related subjects or a graduate in any discipline
with five years’ experience in financial sector is eligible to apply to SEBI for registration as an
investment advisor. Therefore, the investor must look for an advisor with more
than five years’ experience with good market reputation.

Client Base and Assets Under Management (AUM) – Depending on his
financial net worth, the investor must choose the financial advisor based on
his client base. If the investor is a high net worth investor (HNI) then he should look for a
financial advisor who deals with HNIs and if the investor is
medium to low net worth investor then he should look for advisors whose
majority clients are of equal financial status. This will ensure desired client
relationship services and investment plans. It will be prudent for the client to
find out the AUM of the financial advisor
to gauge his overall market standing.

Referrals and Trust
– A referral from a friend or relative will go long way to shortlist the
correct financial advisor. A number of portals are available online to select,
however, it is difficult to gauge their integrity and service before putting
your money through them. The single most important aspect of the client
relationship is trust, which takes time to build up. It is only prudent to
initially invest small sum with the financial advisor and then take time to
gauge his returns, service and work ethics. If satisfied, your subsequent
investment could be a larger sum. It is advisable to give yourself two to three
years to correctly gauge the financial advisor before making more substantial
investment with him. Financial crisis tests the advisor-client trust. As per third
CFA institute investor study, 83% of Indian investors believe their advisers
are prepared to handle the next crisis, compared with 55% of investors

Watch Out Aspects

Vested Interests
– The financial advisors can be influenced by mutual fund houses or NBFCs to
sell their products because of additional gratifications that they offer to
them. Alternatively, he may be under pressure to meet their financial targets.
This results in a conflict of interest wherein the advisor tries to push
through financial products that do not suit the requirements of the investor.

Promise of Excessive Returns – The average equity returns vary between 12 to 15 percent.
All financial products investing in equity markets are subject to market risks
and an investor must understand that risk and returns are directly
proportional. Therefore, to invest on promise of absurdly higher returns of 25
to 35 percent is to take unnecessary risk.
DIY Investors – There are numerous pitfalls that a
DIY investor has to overcome. He must sift through labyrinth of information
available and then undertake correct documentation, have the courage to take
difficult financial decisions, beat the habit of chasing performance and
returns, keep a track of all investments and undertake periodic reviews