Time factor can make or break your investments

Aptly said, as we all know, time wasted can never come back. Hence make the best use of every second. Just as time management is very important in life, you should also realise the importance of time in investment planning. Why? Let us take a closer look. Time should be considered from two angles when considering money:

• Time value of money
• Time factor in asset allocation

Time value of money

All things being equal, your money is worth more today than the same amount in the future due to its potential earning capacity. What it means is money earned today, if invested well, will earn, and hence its value being more in anticipation of the earning factor; the earning factor being the interest earned and capital gain.

You will wonder why I am discussing the time value of money. Here's why.

Meet Ramesh Gulati, a retired 65-year-old professor who had invested his money in buying traditional insurance plans. His plans have started maturing now but as he receives his money he has realised that the amount he is receiving has less value than what he had in mind. He recently received a cheque of Rs 10 lakh on maturity of one of his plans. As he worriedly said, "I thought when I took the plan that this is a big amount and would sustain me through me retirement period. What I had not thought was how much would it be worth after so many years then. I really don't know what to do now."

about importance of time in earning good returns.

The author is a certified planner and can be reached at dhanplanner@rediffmail.com. 

Isn't this the story of most of individuals who have not factored in the inflation cost? How many of you have factored in inflation when planning for your goals? Inflation makes you shell out more in the future for the same thing than now. This is a very important factor at all points of planning. Everyone knows that as time go by things become more expensive.

So if you are planning to build a sum for your child's marriage after 10 years then do bear in mind to save for an inflation-adjusted amount.

Say in today's cost you are willing to spend Rs 5 lakh on your child's marriage 10 years down the line. Then you have to plan for inflation-adjusted cost. That is taking inflation at 7 per cent you will have to plan for Rs 9.8 lakh (rounded off). So 10 years down the line, keeping inflation in mind, you will need Rs 9.8 lakh and not merely Rs 5 lakh.

Time is money can well be proven from this point. That is sooner you start investing more your money will earn or in other words the power of compounding comes into play. Say you need Rs 10 lakh after 10 years. If you start investing now, you can safely invest in equities anticipating earning a return of 15 per cent.

Considering this if you start investing now then you need to save Rs 3,600 per month. Now if you postpone your investments and start after four years then you have only six years to invest and hence will have to go for a combination of debt and equity.

So considering an average return of 9 per cent you will have to save Rs 10,500 per month for the same Rs 10 lakh.

The point I am trying to make is to start saving as soon as possible. Save even if you are doing it with a small amount. Once the cycle starts, your money will earn for you and after certain years due to some reason you cannot save, do redeem the money as that amount will earn for you or in other terms money will compound and earn more money for you.

As and when you can increase the savings amount increase it.

Having looked at the time value of money let us have a look at the other aspect of investing keeping the value of time in mind.

Your asset allocation should be based solely on two factors: your goals which you need to achieve during your life span and the time in which you would like to achieve them. The two go hand in hand. Just deciding on the investment avenue based only on time or on goal is not right. Both these factors have to be considered when deciding on an investment avenue. We have seen the importance of goal setting when deciding on an asset and also the importance of time value of money in planning.

Let us see exactly how time per se is important.

I guess Kunal Bhanshali, 34, a businessman would aptly be able to tell us that. As everyone was taking advantage of the rally in the stock market even Kunal joined the race. Last year when the markets crashed, everyone including Kunal, burnt their fingers. So now in this situation KUnal, who invested money thinking that in the next six months his investment amount would double was left with just half his principal amount.

He was saving this amount for paying the fees for his child's schooling that was due after six months. Thinking he would earn quick bucks on this money. Well that proved otherwise. "What made me do such a reckless thing?" he laments now.

I think if a survey were to be taken of all the people who were in the same boat as Kunal the figure would be huge. I mean who would not have been tempted in the rally that took place. Well when it comes to money emotions must be placed aside.

Kunal had not considered an important factor when he was investing in the stock market: Time. When one considers allocating his assets in equities he has to have holding power. Equities is a volatile market. The volatility gets even out in the long term and hence short-term investment is a big no in equities.

Your hard earned money should be allocated in such a way that when the time comes to realise your goals the investment as done by you should be helpful in achieving them. Hence, when you select the investment avenue for allocating your assets, bear in mind the 'time frame' of investments.

Considering the time factor, let us have a look as to how one can allocate their assets:

Long term: When your goals are at least eight years away or more only then consider having a predominant equity portfolio. As Warren Buffet the world's richest man puts and legendary investor it 'If, when making a stock investment, you're not considering holding it for at least ten years, don't waste more than ten minutes considering it'. Such a long scenario is important because over a period of ten years the volatility of the stock market gets averaged out and you can get an annualised return of 13 to 15 per cent.

Medium term: Would be a time frame of five to seven years. If you are planning for a goal, which has to be achieved in the above-mentioned time frame you can have an asset allocation that weighs in favour of debt products with a small exposure, of, say 15 to 20 per cent, towards equities.

Short-term: Time frame of less than five years. As you must have guessed your asset allocation must be in debt products as although the returns are less your principal would be safe.

Thus time management has to feature in all aspects of your life: be family, work or your investments. Just as time management is very important in your daily lifetime management in your financial planning is also very important. Do not ignore it and see its benefit in your investment as they grow.