4 simple ways to better your returns
NALINAKANTHI V BUSINESS LINE
Investing is more than just saving and parking money in the right asset class
While many of us believe that successful investing is about saving the requisite corpus and investing it in the right asset classes, there is more to bettering your investment returns. Here are four simple things that will help you earn a little more on your corpus.
First, do not miss the opportunity to compound your investment return. For instance, if you are investing in a fixed return investment scheme such as fixed deposits, you can opt for an re-investment option.
When you do this, the interest that you earn on your principal is reinvested and you earn returns on your interest too. This is called compounding interest. How much more can you get this way? That depends on the tenure and interest rate. Sample this, a two-year fixed deposit scheme by HDFC Bank fetches an annual interest of 7.3 per cent.
If you choose the quarterly interest payment option, the total interest income will be ₹14,600 over a two-year period.
In contrast, if you opt for the reinvestment plan, your total interest earned will be higher at ₹15,567.
It is preferable that you go for a reinvestment plan unless you are in need of money to meet your needs or have an alternative investment plan for the interest earned by you. Likewise, with investments such as equity mutual funds, opting for the growth option will help you benefit from the power of compounding.
Consider this; if you had invested in Axis Bluechip Fund dividend option in February 2017, your total return, which includes dividend and NAV appreciation, over the two-year period, would have been 32 per cent. If you had opted for the growth option of the same fund, the total return would have been higher at 36 per cent.
Keep a separate account
Second, maintain a separate bank account for your investments. This will help you consolidate your investments and the return thereon. You can link this to your broking account and channelise your investments such as fixed deposits and mutual funds through this account. This will make it easier to track investment income such as dividend on equity shares and other investments such as mutual funds, FDs, etc that are credited into your account. Reviewing your investment-linked bank account on a regular basis can help you decide on re-investment of your investment pay-outs such as dividends, and avoid the tendency to spend the money.
Besides doing regular investing through this bank account, transfer any windfall you make, so that the same is invested in an appropriate asset class in a timely manner. This will help you earn more on your money, unless you have other plans for your windfall such as paying off a high cost debt/loan.
Review your portfolio
Third, review your investment portfolio on a regular basis for better options, depending on your risk appetite, time to goal and corpus available for investment.
For instance, conservative investors can keep a watch for investment optionssuch as tax-free bonds or highly-rated debenture issues, which can get you more than conventional fixed deposit schemes and yet carry a fixed return making them less risky than equities.
Protect and realise goals
Four, review your financial goals and investments regularly. Investment is also about protecting and realising the notional gains you have made. For instance, if you have made handsome gains in your equity investment and have just one year for the investment goal, you may be better off realising some of the profits by selling them off.
You can consider parking the corpus in fixed return investment schemes such as fixed deposits. This will not just provide you principal protection but also give you guaranteed returns. Also, you can stay insulated from any volatility in the market, which can topple the returns you had made on your equity investment.
The writer is an independent financial consultant
Published on February 24, 2019