Charu's portfolio does not benefit from the effect of compounding because of lack of systematic management. This is the reason she has not seen the kind of appreciation in her portfolio that she should. Charu ends up spending not only her salary but also the income from her investments since all are held in the same account.

To start with, she should shift to the growth/ cumulative option of investments wherever she can. Mutual funds have growth, dividend re-investment and dividend transfer plans. Deposits and bonds have the cumulative option, where the interest is not paid but reinvested till maturity. This ensures that her investment returns are compounded over time.

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This will, however, increase the concentration risk in her portfolio since more of her money is being invested in the same product. Moreover, the cumulative option may not be available in all investments. What Charu can do to address both these issues is to have a bank account designated for her investments. All such proceeds should be credited to this account and the investible surplus at the end of a month should also be transferred to this account. She should use this account to make all her investments.

Charu should make sure that the money is not left idle in this account but invested regularly, preferably every month. Any delay in investing will impact the returns that her portfolio generates. She should have various systematic investments linked to this account. In this manner, she can make sure that her money is put to work immediately and, at the same time, diversify her investments.

Source: [ET]