Each time you receive your interest or dividend, make sure that the sums are ploughed, without much delay, into good investment options.
Ask any investment guru to plan your finances and he will begin by extolling the ‘magic’ of compounding. It is the compounding effect on your investments (simply put, the return earned by your return), that helps even small savings expand into a significant cash chest over the years.
However, for compounding to work its magic, you need to take some action too.
Here are three actions you can take to make sure that you reap returns from interest/dividends.
TRACK YOUR RECEIPTS
In the days of yore, all your dividend/interest payments came to you via cheque through snail mail. That forced you to track and deposit them in the bank regularly.
Now, ECS credits have made all this redundant, with dividend from your shares or interest from your fixed deposit flowing directly into an indicated bank account.
Now, if you spent hours poring over different fixed deposits to select one, surely it is worth equal effort to ensure that the interest payments are indeed coming in. Delays in payment can be as serious as defaults. For instance, a one-month delay on interest payment on a fixed deposit that offers 12 per cent a year, cuts the effective return to 11.07 per cent. Effectively you get the same compensation for a longer holding period.
Monitoring company dividends can be more difficult, because there is no periodicity or assurance about payments. Yet, dividends do make a big difference to your overall returns from stocks.
The Andhra Bank stock price has plunged by some 7 per cent in the last three years. But if you reinvested dividends received, that would have improved dramatically to a 9 per cent return.
If you invested in the Nifty basket of stocks three years ago, your portfolio would today be sitting on a 19 per cent gain, based on stock price appreciation. But if you had received and re-invested the dividends from the Nifty companies at 8 per cent, your gain would be 25 per cent.
SEGREGATE
To make the most of the dividends/interest that you earn every year, you need to keep them separate from your other investments. Allowing these receipts to flow into your salary account is a sure-fire way to lose track of them and end up splurging everything on your Diwali purchases.
Open a separate bank account that will house all your ECS credits of dividend and interest. This will not only shield these sums from spending binges, but will also help you know exactly how much ‘income’ your investments are earning annually. This is handy if you are close to retiring and plan to subsist on this income.
RE-INVEST
Finally, you need to put as much effort into re-investing your dividend and interest receipts as you put into your original investment. Each time you receive your interest or dividend, you need to make sure that the sums are ploughed, without much delay, into good investment options available at that time.
Where you invest may depend on your risk appetite. For interest receipts, it is best that you plough them into safe options — bank deposits or short term debt mutual funds.
If you are conservative, you may also choose to invest all your dividend income from shares in a safe avenue such as bank fixed deposits, so that this part of your savings is protected from stock market swings.
In case you don’t have the time to do all this, put the re-investment exercise on auto-pilot :
If you are investing in equity or debt funds, opt for the ‘growth’ rather than the ‘dividend’ plan.
In the case of bonds or fixed deposits, choose the cumulative option.
Park all your interest receipts in a bank account and have a sweep facility in this account so that the funds don’t idle for too long.
In the case of mutual funds, leave standing instructions to re-invest the dividends either in the same fund or to transfer them to say, a liquid fund.
A caveat here. Opt for cumulative or growth plans only if you are sure about the credentials and credit worthiness of the company managing your money. For risky debt options, it is best to opt for regular interest payouts which you can then re-invest in safer avenues of your choice.
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