The Power of Money Compounding- Series 1B

Discipline & diversification

Consistency scores, both in cricket and in investments! Not being perturbed by intermediate glitches (such as the current one) will help you curb the key fear factor which is detrimental in erosion of your money.

To achieve the best risk-adjusted returns, it becomes absolutely necessary not to put all your money in the same basket. Having a judicious mix of debt and equity is equally important whilst you embark on your journey to become a millionaire.

Ravi had a moderate risk appetite and was keen on buying stocks especially at current levels given the fact that they are available at discounts to their actual value. He had limited knowledge about equities hence I suggested that he start off with equity mutual funds, which is also an ideal way to begin investing into equities.

Often, one is unsure of how much exposure one can assume: a thumb rule is to have equity exposure at 100 less your age; for Ravi it translates into 75 per cent (100 less his age, that is, 25 years) into equities and 25 per cent parked in debt (say fixed deposits for safety). Diversification is what will determine what returns you achieve. In table 1, we have illustrated three scenarios on returns: 8 per cent, 10 per cent and 15 per cent. Although risk is directly proportional to returns, one should aim to achieve optimal returns at risk-adjusted levels.