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Having a Small Budget Shouldn't Keep You from Investing
Apr 7, 2021

The most effective way of wealth creation is through investing your money into various investment avenues that increase in value over time. Investing is an essential part of your financial planning process to achieve your envisioned financial goals. Apart from that, making regular investments instils the habit of saving and financial discipline in the long run; it encourages you to accumulate a corpus in terms of emergency fund that could be a safety net in times of need.

The year 2020 caused various financial difficulties amidst the COVID-19 pandemic and the uncertainty led to rise in medical expenses, pay-cuts and job loss, among other things causing a decline in your budget towards saving and investing. Many investors are hesitant about investing due to small or limited budget that they hold. And you're probably thinking about investments only after you have set a certain huge amount aside for that purpose.

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Recently a friend of mine called, "I had redeemed all my investments due to financial emergency amid the COVID-19 pandemic and now I am willing to start investing again but I suppose I will have to wait until I have a certain surplus and then consider investing. Currently, I could only apportion a small amount aside and that may not be sufficient...right?"

To which I responded, "No, it doesn't matter how much amount you manage to keep aside for investing whether it's small or large. The main purpose of investing is to gradually build wealth for a better financial future. So, instead of keeping yourself from investing until you create a certain surplus, you may start investing as early as possible even with a small budget"

You don't have to be the Wolf of Wall Street to begin investing, even if you have a small amount start investing regularly. Later, possibly in time, increase the size of your investments. If you start small and invest on a regular basis, you can amass a substantial amount of money over time. As it's said, "little drops of water make a mighty ocean".

Notably, there is a difference between saving and investing, saving entails depositing a certain amount in a secure instrument with predictable returns, while investing entails putting the money to work in avenues that carry a certain risk to generate higher returns. Here, rewards come with risk; however, there is a basic principle for investing that you must follow to balance out market risk: always invest according to your risk tolerance, investment horizon, and financial goals.

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Having said that, many of you will have financial goals like; your dream house, luxury car, international vacation, children's education, and retirement fund, etc. In order to achieve these envisioned financial goals, you need to start investing as early as possible and generate a corpus for your financial well-being.

Young adults may find it easier to delay investments considering you have more time and you may start investing after your income has stabilised and have a huge surplus to set aside. However, you may start investing from your first paycheque, as there is no such thing as right time to start investing. The trick is to be consistent with your investment regardless the amount huge or small.

Looking at the current market scenario, if you don't have a large amount or are reluctant to invest a large amount, you may consider Systematic Investment Plan (SIP). This is a convenient mode of investing into mutual funds and it offers you to invest as low as Rs 500/- per month.

SIP will invest a certain amount from your bank account into the mutual fund scheme of your choice on a particular date each month and this will lead you to invest regularly even with a small budget.

SIPs offer you various benefits as listed below:

  1. As you invest regularly every month, it makes timing the market irrelevant
  2. It is suitable for investors with small budget for investing, as it requires minimum investment starting from Rs 500/-
  3. Enables you to lower the average cost of investment
  4. It is an efficient way to plan for your financial goals
  5. It offers to benefit from the power of compounding

SIPs over a longer period of time will compound your wealth and have better risk-adjusted returns, so you should start investing as soon as possible to ensure that you remain invested for a longer period and see your wealth grow.

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If you begin early, you can invest smaller sums and still build a large corpus, as you will have more time until your retirement. But if you wait until you are 35 or 40 years old to begin investing, you will have less time until retirement and will need to raise your investment value to match the duration. Thus, it is always beneficial to start early and stay invested for longer period even with small investment amounts to accumulate a large corpus for a better financial future.

[To understand better use PersonalFN's SIP Calculator]

When you start investing with a small amount, you begin to limit your spending, as you must set aside a certain amount towards your investments. Investing regularly fosters financial discipline and improves the way you manage your money, all of which is essential to be in pink of your financial health.

Although, you may find equities are high-risk investments as compared to fixed income products, they are known to have the potential to generate high returns in the long run and help you build a large corpus even with modest budgets. Hence, it is advisable to start investing as you begin to earn and you will have a high-risk tolerance at early stage of life than later, when you will be occupied with family responsibilities.

Therefore, if you have not started investing yet, you should start now, start small and increase your investments with time. Do note that, wealth creation is a long-term process that survives the market volatilities in various phases and the sooner you start the more time you will have to gain from it.

To conclude...

The Indian equity markets experienced a roller coaster ride in FY 2020-21 due to the COVID-19 pandemic. The markets recovered from its March lows in the latter part of that year, from substantial losses to remarkable gains investor sentiments were transformed.

At present, the coronavirus cases are on the rise again and there are news surrounding the second wave of COVID-19 with possibility of strict lockdown restrictions. Despite the availability of vaccines, the market is expected to be volatile in the short term reacting to the rise in coronavirus cases and its impact on economic activities.

The pandemic's effect on Indian markets has been far-reaching, making it difficult to achieve one's financial goals. When market conditions are expected to be volatile, investing lump sum amounts can seem risky, particularly if you already have a small investment budget.

Investing small amounts through SIP mode of investing is preferable to stay invested in the markets with long term approach rather than missing out on the market rally by delaying investments due to lack of surplus.

The mantra for wealth creation that you must consider is "Time in the market is important than timing the market"

On the other hand, financial literacy plays an important role to make informed financial decisions and lack of financial knowledge will make you lose on opportunities to build your wealth. You must stay financially aware to make efficient investment decisions and help your family regarding financial matters by becoming their 'Financial Guardian'

You could become a financial guardian by enhancing your financial literacy and in case you are wondering how to empower yourself with financial knowledge, PersonalFN's latest special initiative, the "Certified Family Guardian", offers you an exclusive opportunity to learn the finer nuances of money management.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management and making informed financial decisions for yours and your family's secure financial health.

It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

Author: Mitali Dhoke

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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