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Where to invest additional money every month?

Posted on 13 Dec 2021
Author: Sayan Sircar

Tags: Portfolio Construction

6 mins read
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If you can increase the amount of monthly investments, where should you invest next?

Where to invest additional money every month?

📚 Topics covered:

Introduction
Where to invest extra money monthly
- Investment amount should be as per goals
- Choosing investments
More investment choices could lead to more mistakes

Introduction

Once an investor has been investing for some time, there will come a time when their income will increase, and they will have an additional monthly amount they can invest. Alternatively, if you are investing ₹50,000/month, you could wonder where people who have ₹ two lakhs or ₹ five lakhs a month invest. This post deals with both situations.

We have already discussed where to invest spare money available one time here: I have ₹ five lakhs in the bank. What do I do now to get the best returns?. This post deals with the general case where you have more money to invest monthly.

Where to invest extra money monthly

Many investors in this situation start with the question, which is a variation of “Which fund should I choose now?”. But, instead, the investor is recommended to go back to the basics and check if they are investing as per their goals.

Investment amount should be as per goals

If goals are not set, please do so now by following this process step by step: I have just started earning and do not know a lot of finance. What now?

Once you have goals that are set, follow these steps:

Check that your prerequisites are in place: health and term life insurance, emergency fund and sinking fund as described in this post. Enter your goal amounts in this comprehensive goal-based investing planner and follow the SIP amount and asset allocation instructions. This process is described in more detail in this post: I am now ready to do goal-based investing. What now?. Using this

The planner will give two outputs:

asset allocation for equity, debt and cash for the assets you already own. You need to perform a one-time buy/sell to rebalance and reach your target asset allocation: Portfolio rebalancing during goal-based investing: why, when and how?
SIP amount for equity, debt and cash

Choosing investments

Once you have the SIP amounts, you can choose equity and debt funds from here: Which funds should I invest in?

Suppose you already have existing funds where you are investing. In that case, you should evaluate how each fund is doing based on this framework: Are you checking the performance of your funds regularly?.

If you are happy with your funds, invest the extra monthly amount in the same funds as per the SIP amounts specified by the planner. However, if you switch to new funds, start the SIPs in the new funds and stop SIPs in the old funds.

A few things to keep in mind:

If you have investments in Regular funds, you should exit soon: How to switch from regular to direct funds?
When you sell funds, you have to pay tax which you can calculate and minimize based on the applicable taxation rules: How is tax calculated on selling shares/MFs and how do to do tax harvesting?
Do not start investing in a similar fund for the same goal. If you have XYZ LargeCap fund, do not start investing in ABC LargeCap fund while staying invested in XYZ LargeCap. Having multiple funds in the same category negates the outperformance of one fund with the underperformance of the other(s). This way, the portfolio ends up close to index fund returns less the high TER of active funds. In such cases, just switch after calculating tax impact
Do not create clutter by adding too many funds. It isn’t easy to track and manage. Some investors prefer to add similar funds from different AMCs for different goals, but that is more relevant beyond a certain portfolio value in crores. It is simpler to stay invested in the same existing funds if they are good enough. This article discusses this concept in more detail: Should the same funds and folios be chosen for different goals?

Based on this discussion, our recommendation will be to stick to the same funds irrespective of how much the investment amount increases with time: going from ₹20,000 to ₹2 lakhs/month does not require different investments. You can create a very simple portfolio with not more than 2-3 funds that is easy to track and manage without losing out anything that can be got just with 10-12 funds or more. As we have discussed before, asset allocation and rebalancing as per goals is more important in portfolio construction than looking for the best fund to invest: What should be the Asset Allocation for your goals?

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Also read
What should be my mix of MF, Stocks, Gold, NPS, FD, PPF and ELSS if I want to invest 50k per month?

More investment choices could lead to more mistakes

An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor, and the consequences of being classified as such, vary between countries. - Wikipedia

In India, SEBI norms released in August 2021 say that you can be an accredited investor if your net worth is ₹7.5cr or more or have an annual income of ₹2cr or more. More details are available here.

The financial regulator in each country restricts which investor can invest in what securities. For example, to invest in PMS schemes, you need to invest at least ₹ 50 lakhs. The rationale here is that with increasing ticket size, comes an increasing appreciation of risk associated with such investments.

Investors aspiring to reach accredited status should clearly understand the balance of the potential of getting higher returns vs the higher risk in alternative investments. One quick way of ascertaining the suitability of such assets is to check if the investment manager’s interest is aligned with that of the investor. A typical 2/20 fee structure (annual 2% of AuM and 20% profits) leaves the entire downside for the investor since the AuM fee is paid out irrespective of fund performance. Before investing, the investor should check if the advertised returns, post fees, beat a humble Nifty index fund. Having more money to invest does not necessarily lead to becoming a sophisticated investor. It also increases the risk of making bigger mistakes.

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