Small investments make market sense: Strategy to build corpus steadily

An asset-allocation approach will help you in not taking an outsize risk

Investors often say the markets have done but well they do not see significant gains in their portfolios. If a portfolio is small, then the returns cannot be big.

A 20 per cent return on Rs 200,000 is Rs 40,000 and the same on Rs 2,00,00,000 is Rs 4,000,000.

Does that mean you must invest big amounts to feel content? Not necessarily.

That’s where compounding comes to your rescue. By investing small amounts consistently, you can accumulate a big corpus. It is simple math, but we don’t relate to it as easily.

Let’s say you invest Rs 20,000 per month in a product that gives you 10 per cent per cent return per annum after costs and taxes. You will reach Rs 2,00,00,000 in 23 years ( six years after you hit Rs 1 crore). Around the 20th year, the returns are contributing to 85 per cent of the portfolio growth.

You may invest 1 Rs 100,000 per month when you the markets, potential high returns, and risks. You may also start with an SIP of Rs 5,000 per month in equity funds. Starting small is not a bad approach: It helps you understand markets without too much risk. However, your position size should not always remain small. It would help if you had some basis to make your position meaningful. An asset allocation approach is an excellent way to set milestones for your portfolio.

Start small but set targets. Reach 10 per cent in risky assets (say equity funds) by the end of the second year and 20 per cent by the end of the fourth year.

There is another approach: You hear about an investment opportunity and sense a chance to earn quick returns. You have Rs 2,00,000 to spare. However, even if this investment were to double, you would earn only Rs 4,00,000.

Instead of investing Rs 2,00,000, you put in Rs 4,00,000 (20 per cent of your net worth) in one go. While this investment may be hugely profitable, this is not a good approach.

Taking an asset-allocation approach can prevent you from taking an outsized risky bet.

The writer is a Sebi-registered investment advisor