What Investing Options Exist for a 42 Year Old with Investible Surplus of Rs.3000 Per Month?

Full and Actual Question:

As a 42 years old with a family of 4, earning ₹ 22k per month how to invest more with a debt of 5k,10k for house rent, and 4k other expenses?

Dear Mr.Daniel Paul!

You seem to have an investible surplus of Rs.3,000 per month which is decent. Your present age of 42 also decent enough with an active investing life of about 23 years and another 10-15 years even if you do not invest you keep live your past investments, although it would have been great if you had asked this question when you were 22 instead. So keep a target of of 75 to 80 years as investment life which is great.

Try to get rid of your debt repayment obligation of Rs.5000 per month as soon as possible and after that try to avoid borrowing money. Please destroy the credit card(s), if you have any, immediately.

Your present budget seems to be very tight. Your expenses are not high but your income is very limited. Can you try for a second job that may boost to your investible surplus by another Rs.5000 to 10000? This can be very helpful. If you manage to earn this extra income, please do not destroy it on luxuries like car, holidays and eating out. Use the extra money for investment only.

Open a SIP or invest in an Exchange Traded Fund (ETF) for the next 23 years. Do not stop this investment for any reason whatsoever.

If you follow this simple advice keep invested for the time frame suggested, when you look back at the age of 65 you would have accumulated a net wealth of Rs.40.46 lakhs, after an assumed annual inflation of 10%, which is very high and long term stock annual market returns of 15% which is very reasonable.

If you keep the investment alive, without disturbing for another 20 years, you would have become a really rich and wealthy person with a net wealth of Rs.5.04 Crores. Please see the calculations below:

Returns From Humble Investments

How such spectacular results are possible out of such humble investments of Rs.3000 per month? That is the power of SIP and Miracle of Compounding.

Happy Investing and Getting Rich!

Anand

Please Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

How Do I Invest Small Amount of Money in Share Market Safely?

Dear Friend!

I find your question is very sensible on two crucial aspects: small amount of money and safety of investment.

Safety of investment comes from knowing what we are doing. Conversely not knowing what we are doing causes ‘Investment Risk’. There are two things you can do:

1. You can learn investing safely in the share market through ‘Value Investing’ for which I recommend you read the wonderful book, “The Intelligent Investor” by Benjamin Graham. Value Investing is safe and shares can be purchased for small amounts of money. 
   
2. If you can not learn investing for whatever reasons, you may invest in an ‘Exchange Traded Fund’ or ‘ETF’ or a ‘Mutual Fund’.

ETFs:

An ETF is created by fund managers that exactly reflect popular stock indices like BSE Sensex and NIFTY. In India ‘Goldman Sachs’ provide many ETFs, the popular being ‘Nifty BEES’ and ‘Junior Nifty BEES’. You may also invest in any mutual fund of a credible organisation. ETFs can be purchased just like shares on the stock market through online online platforms.

Mutual Funds:

Mutual Funds are operated by reputed financial institutions. There are different funds based on equity, debt and various mixes of both. Debt funds provide regular income but no capital appreciation. Equity funds provide both. Please do not allow yourself to be confused by issues like which mutual fund best returns. All funds are equally good in the very long term.

What is important in investing is not to disturb the investments for very, very long periods of time, say for twenty to fifty years. Over such long periods of time the law of ‘Miracle of Compounding’ will work for you in creating significant wealth.

In conclusion, yes, you can invest small sums safely in the stock market and become rich over a long time.

What Is Dollar Cost Averaging?

When you buy shares at different prices on various dates the result is an amazing thin called the 'Dollar Cost Averaging' having a profound impact on your portfolio and returns on your investments.

Dollar cost averaging is a nice sounding term for a simple concept of weighted average cost. let us see the example from our educational portfolio 'Portfolio 2K15'.

The ‘Dollar Cost Averaging’ is done only a way of Reporting. Your port folio shows the average holding cost at a glance for your convenience. However when you click on the name of the scrip the detailed page opens showing the various purchases on the various dates at various prices. Therefore I would say that the actual data and records remain intact and only in the report the holdings are dollar cost averaged.

If we examine my favourite scrip NMDC Ltd., in April 2016 we are holding 444 shares at weighted average holding cost of Rs.107.58. If we go deeper into the detailed purchases on various dates it will look as shown in the following table:

We can see that beginning with a price of Rs.130.48 in March, 2015 when the market was high, we were able to buy the shares at as low a price as Rs.81.35.

The beauty of dollar cost averaging is that over a very, very long period of time of say three to four decades, one is able to purchase the scrips at various levels, from very low and the weighted average cost is optimal, making timing the market, which is extremely difficult, irrelevant.

The second advantage is one can achieve spectacular dividend yield through dollar cost averaging. NMDC is quite generous in paying dividends and the yield is generally 10%, which on a tax free basis is simply superb. Suppose after 20 years the price of the share is Rs.800 and the dividend yield at that time is 10% it means the company paid a dividend of Rs.80 per share. Such a dividend on the 444 shares purchased at an average cost of Rs.107.58 is yield of 74.36% per annum. If you consider the capital appreciation, your 444 shares bough at and average Rs.107.58 are valued Rs.800 apiece, giving a return of 643% in twenty years. 

From the above it becomes clear how Riches are built on stock markets through prudent investments over long periods of time through dollar cost averaging. 

Is the Stock Market a Place to Make a Fast Buck?

I have met in my long consulting career of about three decades many people who believe that the ‘Stock market’ is the place to make a fast buck – a place where one can become rich quickly. I have also met an equal number of people who is convinced that stock market is the most dangerous place on the earth, and that it is meant solely for gamblers and speculators and certainly not for investors. I can state with conviction that both the extreme views are far from the truth.

Playing the stock markets is certainly not the get-rich-quick solution. On the other hand those who enter with such a notion are sure to burn their fingers. Of course there are a few exceptional examples of individuals who have consistently made successful bets on stocks, currencies and commodities, but these examples do not hold good for most of the large number of speculators indulging in day trading. Those who had made quick gains a few times should attribute the success only to pure luck; they are bound to run out of lady luck soon and are face the unpleasant consequences.

Stock market is also a place where through prudent, disciplined and sustained investments, spectacular wealth can be built over very, very long periods of time, spanning two to four decades.

Why is it that there are no shortcuts to wealth creation? What are the essential ingredients of wealth creation?

Essentially there are two key factors behind wealth creation: natural growth in companies and secondly by the operating of the compounding effect.

Natural Growth:

Companies that supply goods and render services in an innovative and efficient manner are bound to prosper and consequently the long term investors owning the shares of such companies are also bound to prosper through regular dividends received during the long period of investment and appreciation in the market price of the shares, on the back of growth in the ‘Earnings Per Share (EPS)’.

Compounding

The amazing results of compounding were discovered and propounded by Albert Einstein. The ‘Miracle of Compounding’ works only over long periods of time and especially the spectacular results start occurring at the fag end of the very long period. Being a natural law like any other law of physics it operates at its own pace as per its own nature – there are absolutely no shortcuts.

To conclude, one cannot consistently make a fast buck playing on the stock markets, but through disciplined investments one can build significant wealth over very long time.

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