When you began your investment journey, you may have started by investing in fixed deposits, much like your parents or grandparents, who invested in these “safe” instruments. However, times have changed. With rising inflation, fixed deposits are no longer viable investments because they do not provide inflation-beating returns.
Investing in bonds, debt mutual funds or Public Provident Funds will get you slightly higher returns than FDs. While these investments certainly beat inflation, you would need more rewarding options to generate long-term wealth.
For long term investments you can consider investing in equities and equity mutual funds if you want your money to give you wealth-generating returns. But how can you move your debt investments to equity investments? Follow these four steps to make the shift successfully:
Analyse Your Current Investment
To start, take stock of your current investments. If you have invested in fixed deposits, you have to wait until maturity, so you don’t have to pay the penalty. If you have invested in PPF, you can withdraw only after the 15-year maturity period. Please make a note when your investments mature so that you can reinvest them.
Find Out Your Risk Appetite
If you have decided to move your money to equities, great! Even then, you need to be aware of your risk appetite. If you still have a low-risk appetite, start by investing about 20-25% of your corpus in equities or choose a fund like a hybrid mutual fund that also invests in debt securities. If you can stomach more risk, you could invest a higher portion of your corpus in equity mutual funds or even start experimenting with stocks. However, if you want to invest in stocks directly or through equity mutual fund, ensure you only invest an amount you can afford to lose.
Consider Your Time Frame
Suppose you want to invest for retirement and have about 15 years for it. You could invest in the National Pension System (NPS) with a higher allocation to equity. However, note that NPS has a lock-in period, and you must allocate at least 40% of the maturity amount to annuities. If you are a more disciplined investor, you can invest in equity mutual funds like flexi cap mutual funds. If you are investing for a shorter period, say five years, you could invest in a hybrid fund to spread the risk.
Stagger Your Investments
To ensure you don’t invest at the wrong time, space out your equity investments. This way, you can reduce the cost of purchase. For instance, you could decide to invest about 60% of your corpus in equities. Start by investing the entire amount in a debt fund. You can then set up a Systematic Transfer Plan to slowly move your money into an equity fund over the next few years. The best approach would be to spread out your lumpsum equity investment over half the time it took to earn it.
Moving your investments from debt to equity can be a good call to increase your returns. However, you shouldn’t do it without sufficient research or all at once. It is best to stagger your shift over a period of time. If you want professional advice on how to do this, you can speak to a Geojit professional who will help you create your investment portfolio.