How to Start Investing on a Budget?

Set financial goals

The first and foremost step is to identify and set your financial goals. Some of the most common financial goals are to have a lumpsum retirement corpus when you retire and save up for a down payment for a house, a car, or your child's education. Determine your financial goals based on what you want to achieve in life 5, 10, and 30 years down the line. Once you set your goals, identify the amount needed to fulfill these goals. You can use different tools like a retirement planning calculator or mutual fund SIP calculator to ascertain the money you need to fulfill your goals. If the person is in the 20-28 years range, retirement may not be the primary goal. Higher studies, career-oriented travel, car, etc. would be the goals. Use SMART to identify the top 3 goals.

Have a Budget

Saving and investing are often postponed primarily because there is not much money left after paying for equated monthly instalments (EMIs) and expenses. However, if you organize your finances, you can start saving and investing with your current income. Start the budgeting practice by determining your income and all essential expenses such as EMIs, rent, and utilities. This way, you can identify how much money you are left to spend on entertainment and invest. By just cutting down on your unnecessary expenses by a small portion, you can start saving and investing. If you don’t know where to start, you can use existing budgeting techniques. One of the most popular budgeting techniques is the 50/30/20 rule, where you spend 50% of your income on needs, 30% on wants, and 20% goes to savings and investment.

Explore low-cost investments

The next step is to explore low-cost investments that require a limited investment amount. The market is filled with small investment options such as mutual funds, fixed deposits, recurring deposits, and various government schemes such as public provident funds, national pension schemes, and national savings certificates.

You can choose any of these to start your investing journey. However, of all the investment options, mutual funds are the most popular among investors. You can start investing in them with just Rs 1000 a month through a Systematic Investment Plan (SIP) and earn superior returns in the long term. They allow you to invest in a bunch of stocks and securities.

Start small, be consistent

Building a secure financial future is essential, but it shouldn't come at the expense of your present well-being. You don’t need a ton of money to start your investing journey. Even Rs 500 or Rs 1000 invested per month can give you high returns through the power of compounding. Moreover, through regular investing, you buy mutual fund units at different price points, which can lower your average investment cost and boost your returns. Ultimately, by being consistent with your investments, you can develop financial discipline and maximize your gains in the long term.

Being consistent can be very rewarding Investing Rs 500 every month for a period of 30 years at a 12% return will give you a return of Rs 15.84 lakhs for a total investment of just Rs 1.8 lakhs. And if you invest Rs 1000 a month for the same period and same return, then the total investment after 30 years will be Rs 3.6 lakhs, and the return is Rs 31.6 lakhs.

Automate your savings

The best thing about investing is that you can automate your investments. Options such as SIP investment can help you set up an automatic transfer from your savings account. This way, you can stay consistent with your investments without even thinking about them.

Diversify your portfolio

Diversification is the cornerstone of a healthy portfolio, and it simply means spreading your investments across different asset classes. This helps manage risk because when one asset class dips, others may rise, smoothing out the overall volatility of your portfolio. While it can be challenging to directly invest in a variety of stocks, bonds, real estate, and gold with limited capital, mutual funds offer a convenient solution. Within mutual funds, there are equity mutual funds, debt mutual funds, and hybrid funds. By choosing a combination of these funds, you can achieve your goal of diversification even with limited investment to manage your portfolio risk.

Increase contributions over time

As your income increases, make sure to increase your investments as well. This will ensure your portfolio will achieve inflation-beating returns and help you accumulate higher wealth for your goals. In the above example, you saw that Rs 1000 invested a month can help you accumulate Rs 36 lakhs over a period. If you increase the investment by just 10% every year, then the returns will be almost 2.5 times higher at Rs 88.34 lakhs during the same tenure. Ideally, if your income grows by 10% every year, then you should increase your SIP by 5-7%.

Invest for the long-term

Financial markets can be very volatile and unpredictable. While short-term ups and downs are inevitable, history shows that over longer periods, markets tend to trend upwards. This means the value of your investments has the potential to grow significantly in the long term.

The key is to adopt a long-term perspective and invest for at least 5-10 years or even longer. This will allow the market's growth to smooth out the short-term fluctuations and magnify your returns. Even if the market experiences a downturn during your investment period, staying invested allows you to benefit from the potential recovery and future growth.

Take the help of professionals

With so many investment options and so much advice on the internet, investing can be very overwhelming. Hence, it is best to seek the advice of a professional. A mutual fund advisor can help you choose the right investment that suits your financial goals and risk-taking capacity. They will also help you monitor your portfolio to ensure you achieve all your financial goals.

Conclusion

Investing doesn’t require a lot of money, but what it requires is consistency, discipline, and patience. Investing on a budget is not only an easy task but also a clever one. This way, you won’t be intimidated and can stay consistent and disciplined, which is the primary requirement in investing. Remember, small amounts can add up significantly over time thanks to the power of compounding. So start investing early, stay disciplined, and watch your wealth grow!

Happy Investing!