Investment Strategy Basics: How much, Timing, Frequency & Methods

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Okay, so now you know that you need to factor in your risk and return profile while building a portfolio of investments. But the questions don’t end there. As a beginner investor, your head is perhaps swarming with a lot of other queries.

  • How much should you invest?
  • What’s the best time to invest?
  • How frequently should you invest?
  • And what are the different methods of investing?

If these are some of the questions weighing upon you, then keep reading. In this chapter, we’ll tackle these issues and give you some clarity about the basic investing strategies that you can adopt as a beginner.

How much should you invest?

There’s no hard and fast rule regarding this. It’s a very subjective issue. In fact, how much you invest depends on a number of factors, like

  • Your monthly/annual income
  • The nature of your job (salaried or self-employed)
  • Your fixed and regular expenses
  • The amount of debt you owe

To figure out how much you should invest, you can start by preparing a personal budget. Basically, this budget should include the details of how much you earn and how much you spend each month. In the expenses section, make sure to include all the fixed expenses that you regularly pay each month, like rent, electricity costs and everyday groceries. Once you subtract these fixed costs from your earnings, what you have left is the disposable income.

Scenario 1:

For instance, say Govind earns Rs. 50,000 each month.

And say his monthly expenses are as follows.

  • Monthly rent: Rs. 10,000
  • Electricity expenses: Rs. 4,000
  • Groceries and other utilities: Rs. 5,000
  • Fuel costs: Rs. 1,000

So, that brings his total expenses to Rs. 20,000 per month. And it leaves him with Rs. 30,000 in hand. In this case, here’s what he can do. He can set aside some money for emergency expenses or for his variable costs and maybe invest Rs. 15,000 each month.

Scenario 2:

Let’s look at Rohit’s budget. Say, like Govind, he also earns Rs. 50,000 each month. However, he lives in his own house and doesn’t need to pay rent. His monthly expenses will then be as follows.

  • Electricity expenses: Rs. 4,000
  • Groceries and other utilities: Rs. 5,000
  • Fuel costs: Rs. 1,000

So, that brings his total expenses to Rs. 10,000 per month. And it leaves him with Rs. 40,000 in hand. In this case, he can set aside some money for emergency/variable expenses and maybe invest as much as Rs. 25,000 each month.

You see how the amount of investment changes in these two cases? That’s why it’s important to look at your specific needs before deciding on how much to invest.

What’s the best time to invest?

As we’ve already seen in Module 1, the best time to start investing is as early as possible. But timing is much more than merely knowing when to start investing. For instance, what’s the best time to invest in specific assets like the stock market or real estate? That again depends on your investment strategy. Let’s take the case of Govind and Rohit again to understand this better.

Scenario 1:

  • Govind wants to invest in real estate. He believes in buying low and selling high. So, although he has some capital ready, he waits for the real estate prices to drop before putting his money there.
  • Right now, the price of properties is at Rs. 5,000 per square foot.
  • 2 years later, the price dips to Rs. 3,000 per square foot. That’s when Govind makes his investment in real estate.
  • 10 years down the line, when the price skyrockets to Rs. 10,000 per square foot, he sells his property for a decent profit of Rs. 7,000 per square foot (Rs. 10,000 – Rs. 3,000).

Scenario 2:

  • Rohit also wants to invest in real estate. However, he’s willing to invest right away, since he believes that the prices will anyway go up in the future.
  • So, he makes his investment today, when the price of properties is at Rs. 5,000 per square foot.
  • 2 years later, the price dips to Rs. 3,000 per square foot. But Rohit is unfazed because he believes that years down the line, the prices will shoot up.
  • As expected, 10 years later, the price skyrockets to Rs. 10,000 per square foot. Rohit then sells his property at a profit of Rs. 5,000 per square foot (Rs. 10,000 – Rs. 5,000).

This profit may not be as high as Govind’s. But Rohit had bought the property 2 years before Govind and in those years, he earned passive income that Govind lost out on. This goes to show that the timing of investments varies from one person to another, depending on their strategy, their goals and their general outlook.

The timing also depends on your age. Depending on how old you are, you may choose to invest in different investment options. Here’s an illustrative example.

  • In your twenties, when you’re willing to take more risks, you may invest in direct equity.
  • Later, in your thirties, it may be time to look at more stable investment options like mutual funds, gold and real estate. This may also be the time when you look for investment options that help save for retirement, like PPF or bonds.
  • Much later, in your forties, you may rely more on bank deposits and other safer investment options. 

You see, this is why the best time to invest in different kinds of investments again depends on the investor’s age and the goals that they wish to meet.

How frequently should you invest?

Some investors frequently infuse more capital into their portfolio, while others invest a huge amount upfront and wait patiently for their capital to grow. Based on your income, your choice of investments and your goals, you can invest in any of the following frequencies.

  • Monthly
  • Quarterly
  • Half-yearly
  • Annually

You can also change the frequency of your investments periodically to suit your life goals.

What are the different methods of investing?

Lump sum investments and Systematic Investment Plans (SIPs) are two of the most basic investing strategies.

In the lump sum investment method, you invest a huge amount upfront. You can opt for this investment method in the following scenarios.

  • If you’re self-employed, since your earnings may not be periodical
  • If you’re investing in assets that require an upfront investment, like real estate
  • If you have a lump sum amount saved up

In the SIP investment method, you invest small amounts periodically. You can opt for this method in the following scenarios.

  • If you’re a salaried employee, since your earnings may be periodical
  • If you’re investing in assets that support the SIP strategy, like equity and mutual funds
  • If you do not have a lump sum amount saved up

Rebalancing your portfolio

Once you’ve constructed an investment portfolio based on your goals and needs, it’s not enough to let it sit. You’ll need to revisit your portfolio every once in a while and ensure that your investments are performing as you need them to. If they’re not, you may need to sell off some poorly performing assets and reinvest that capital by buying assets that show potential for growth. This is effectively what it means to rebalance your portfolio.

When to rebalance your portfolio?

You can rebalance your portfolio at set points in time, on a monthly, quarterly, or annual basis. Another way to rebalance your portfolio is to do it when your assets change by a certain amount.

For instance, say you’ve built a portfolio that has 50% equity and 50% fixed income investments. You could revisit it and rebalance it every 6 months. Or, you can rebalance it when either of the sections of your portfolio change by 10%. So, in this case, if the equity component drops to 40%, that is when to rebalance your portfolio.

Wrapping up

Okay then, when it comes to identifying your individual metrics before making investment decisions, we’ve covered all the bases. The next thing you need to know is what investment options to choose from to create your investment portfolio. If your first thought was direct equity, we like how you think. However, there are also many other investment options beyond what the stock market offers. Head to the next chapter in this module to find out more. 

A quick recap

  • How much you should invest is a very subjective issue. It depends on a number of factors, like your income, the nature of your job, your fixed expenses and your debt level. 
  • What’s the best time to invest? That depends on your investment strategy, your goals and your general outlook.
  • Based on your income, your choice of investments and your goals, you can make your investments monthly, quarterly, half-yearly, or annually.
  • Lump sum investments and Systematic Investment Plans (SIPs) are two of the most basic investing strategies.
  • Once you’ve constructed an investment portfolio based on your goals and needs, you’ll need to revisit your portfolio every once in a while and ensure that your investments are performing as you need them to.
  • You can rebalance your portfolio at set points in time, on a monthly, quarterly, or annual basis. 
  • Another way to rebalance your portfolio is to do it when your assets change by a certain amount.
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