Investment Shastra

What’s your Investable Surplus?

Your Investable Surplus determines whether & when you can meet your goals.

Your Investable Surplus is the amount of money remaining with you after meeting all your expenses e.g. monthly income minus monthly expenses. It is the money you don’t need now or in the near future, and is available for long term investment.  It’s an important factor in your planning, as it determines whether & when you can meet your goals.

Don’t touch this money

To be sure that you don’t touch this money, you first need to take care of two important things in your life.

  • Take a Life Insurance, a Term Plan to adequately protect your family in case anything happens to you. Term insurance is a cost, not an investment, so add it to your expenses. If you don’t have a good enough plan right now, take one immediately
  • Take a Medical Insurance for you and your family, so that any medical emergencies do not require you to touch your Investable Surplus, well largely.

After adding these insurance costs to your other monthly expenses you arrive at what you can save on a monthly basis, your monthly Investable Surplus.

You may also have your current savings, the money you don’t need in the next few years.  Deduct an Emergency Fund from it, and now what remains is your lumpsum Investable Surplus. An Emergency Fund is an amount a ‘minimum 6 times of your monthly expenses’ and a ‘maximum of 12 times.’ It means, if you lose your job or leave your job after having a showdown with your boss, or face any other emergency; you will have money to cover 6 to 12 months expenses.

Don’t keep your monthly Investable Surplus into your savings account.

For 2 reasons,

  • The thought of a good amount of money in the bank encourages unnecessary and irrational spending e.g. casual spending on weekends and impulse purchases. No one recommends living a unhappy life today. But, now you look at some of the things you spend on today and decide, ‘Can I do without it or a lower cost version of the same?’
  • Interest rate that banks pay on balances in savings accounts are very low

Transfer your Investable Surplus immediately (e.g. when you get your salary) to your Demat account or park it in Liquid Funds (& liquidate when you get an investment opportunity)Knowing that money has already been allocated, and not available for expenses, will help you acquire disciplined spending habits.

Invest your Investable Surplus smartly

Use your monthly and lumpsum Investable Surplus to meet both your short-term commitments and your long-term goals. There are two main questions to be answered correctly to ensure investing successfully to meet your long-term goals.

  1. How much of your Investable Surplus do you invest in which asset classes i.e. Equity, Debt and Gold asset classes?” In investment parlance, it is called the Asset Allocation. And, then how much to invest in which specific assets within each asset class?E.g. in the Equity asset class, (a) How much into Direct Stocks, Mutual Funds and Index Funds, and (b) Within Direct Stocks, how much of a specific stock, which specific Mutual Funds or Index funds and how much to each one of them? This is all about choosing the right asset.In case, you have a definite commitment of money within the next 5 years, don’t put that money in equities. Because, there is always the risk that the market may not grow sufficiently in a 5 year period and give substantially better returns than a Debt Fund/Fixed Deposit.
  1. When the market and specific asset prices change, do you stick to asset allocation and asset choices? Or change them? And, if so, how and how often? Solution is to compare the future potential Risk-Adjusted Returns within the asset class and select the ones which are most promising. We call it Re-shuffling.

When you cover multiple assets, and re-shuffle it whenever an opportunity arises, you have more options to build a good Wealth-creating Portfolio.

Watch the video on this article.

Also Read: ‘What are different Asset Classes?’

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