Investing means you are laying out money today with the expectation to get a lot more money back in the future. This helps you to set aside money while working and use that money to meet your financial goals.
In simpler words, this essentially means you are laying out money now to receive more money in the future. Don’t get confused between investing, speculating, saving, and trading, they all are different.
Before getting into investing, here are 4 most important reasons for one to invest;
- It helps to fight growing cost of living (generally refered to as inflation).
- You can have a better corpus by the end of the defined time period.
- To meet life’s financial aspiration.
- To secure your future
Remember, you can’t start investing without putting money away. Which means first you have to save money to start investing.
If you keep your savings idle its nominal value remains the same but real value decreases over the years due to inflation. Therefore, instead of keeping your savings idle, you should park it somewhere to get a satisfactory return to beat the inflation. This is known as an investment.
Also Read: Investing Vs Speculating Vs Saving
Before getting into the investing process, you need to first assess your financial health.
Are you financially fit to start investing?
Are you checking your financial health every year?
Learning how to check your financial health can help you meet your financial goals. The best way to check your financial health is to calculate your own net wealth.
Knowing your net wealth can help you to know where you stand, how you can improve your savings, how to manage your debt, and more importantly, you will know how much you can invest every month or quarter or year.
Networth or net wealth is calculated by taking out your total liability from total assets. Your net wealth should improve year on year.
For example, if the value of your total asset is Rs 1 Crore and total liability is Rs 80 lakhs, it means your net worth is Rs 20 lakhs, which is calculated by subtracting Rs 80 lakhs from Rs 1 Crore.
If you have a positive net worth, your aim should be to have a growth on the net worth every year. In order to do that, you should have a proper plan and execution strategy.
Determine your financial goals to achieve?
Before you start investing, take some time to think about your financial goals.
Find out why you want to invest? How much money do you want to accumulate and why? Are you investing for your retirement? Do you want to buy a home?
While setting your financial goals, you need to decide on following three important things;
- The time period within which you want to achieve your target
- The total amount you want to accumulate
- Goals you want to achieve
Remember, whatever you dream of, rationally, is possible only if you have a proper financial plan and execution strategy for it.
The financial plan will work as a road map for your financial independence. A proper investing strategy will help you to make your dream come true.
Determine how much you can invest
One of the best pieces of suggestion given by experts is that, invest as much as you can.
Don’t put yourself into a situation to sell your investments to cover basic expenses. It’s not the way you should invest.
To take care of your basic expenses, you need to set up an emergency fund before getting started. We will talk about it in the later part of our article.
In order to know how much you can afford to invest periodically, you need to take out your regular expenses from income to find out the surplus amount you left with.
To manage your expenses better, you need to look at avoidable expenses and see what can be rationalised. Avoidable expenses are your leisure and lifestyle expenses such as dining out, movies, holidays, and shopping unnecessary things.
We have certain unavoidable expenses such as rent, utility bills, food, and health care expenses.
You need to ask yourself how you can manage your avoidable expenses in the best possible way to save your hard-earned money.
One of the best investing advice by Warren Buffett is “Don’t save what is left after spending, but spend what is left after saving”.
Create an emergency fund before you start investing
In order to avoid financial problems in case of emergencies, it’s always suggested to have at least 5-6 months living expenses in a risk-free liquid instrument which can be your savings account or liquid government securities, known as an emergency fund.
Emergency fund is also referred to as rainy day money or contingency reserve.
If you have less cash reserve, start with a goal to accumulate at least 6 months of your household expenses in a saving account.
Learn more on why and how to set up an emergency fund before investing.
Do you have enough insurance?
Health and life insurance will protect you from bad things. You should carry enough insurance to cover your life, health, home, and other assets.
Out of these, health and life cover is a must.
As a breadwinner of the family, you need to make sure you are adequately covered to get financial security for your family.
Based on your income and health risks you need to make sure that you have a better deal with a good insurance company.
Buying life insurance and health insurance also gives you tax benefits under section 80C and 80D respectively.
Decide which type of assets suitable for your financial goals
Now the most important question is “Where to invest”.
You have plenty of options to invest your money to get a good return. Based on your goals, select the best investment most appropriate for you. It depends on your expertise and investment strategy you adopt.
Here is a list of financial assets which can help you to choose your choice of investing that suits your risk and return temparament;
- Mututal Fund
- Corporate Bonds
- Real Estate
- Fixed Income Instruments
- Gold and Silver
Equity or Stocks
Equity shares in business mean you are holding a certain percentage of ownership in that company to get entitled to a share of the profit or losses. Which means you are investing in a business.
In India, investment in equity involves buying shares of publicly listed companies from Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
If you have decided to invest in stocks or equity, then you have two options. You can buy stocks of a publicly-traded company or a company that is not listed.
The best and easiest way is, to invest in publicly traded companies as you will always have the option to sell it publicly through a stock exchange. Therefore, you will not have liquidity issues if invested in publicly traded companies.
Indian equities have generated returns close to 14%-17% CAGR (compunded annual growth rate) over the past 15 to 20 years. Higher return can be generated if invested in some of the best and well run Indian companies.
However, if you know a private business that can do great in the future, you can choose it for your investment. But do your own research before selecting the company to invest.
Historically, owning stocks of publicly traded companies has been a great source of wealth accumulation.
The market price of a publicly-traded stock fluctuates based on the supply and demand for that share on the market.
If you want to invest in the stock market on your own, you need to understand all the basics and financial jargons used which include earnings per share (EPS), market capitalization, price to earnings ratio (P/E), return on equity (ROE), and dividend payout.
There are people who are afraid of the stock market.
They fear the market due to lack of knowledge, skills, and most importantly don’t have time and courage to get in.
For them, the best alternative to owning individual stocks and/or bonds is mutual funds. It’s one of the most popular ways for the common man to invest in the stock market.
A mutual fund is a trust of investors to which they pool money in order to invest based on the terms and conditions they agreed for. They hire a fund manager and a team of professionals to research and do all those things required to invest their money for a better return.
Mutual funds allow you to invest in many different financial assets which include stocks, bonds, money market instruments, and others.
Mutual funds help beginners who are just beginning their investment journey to invest in risky assets such as stocks or bonds or a mix of stocks and bonds through a professional fund manager.
When you invest in a mutual fund, you buy units of mutual funds based on the net asset value (NAV) at the market’s close.
Investment in equities and/or mutual fund is known to beat the inflation if remain invested for a long period of time.
Corporate and government Bonds
Corporate and government bonds are also known as fixed-income securities. If you are buying these securities, it means that you are lending money to corporations or the government, as the case may be, in exchange for interest income.
This type of investment will give your regular income. Best suitable for retirement. Certain young investors are also interested in getting regular income to take care of certain living expenses.
Investing in Government bonds is considered as the safest way to make money.
Perhaps the oldest and most preferred investment option in real estate.
Real estate investment involves buying and selling of both commercial and non commercial land and/or building. For example, buying and selling of sites, apartments, and commercial buildings.
You can make money from real estate in many ways. You can either develop a property and then sell it for a profit or own a property and let it to others for rent. You can buy a home for yourself.
However, to get started you need large investment.
Fixed Income Instruments
In India we have investable instruments that has very low risk to the principle. Returns in the form of interest paid either quarterly, semi-annually or annual interval based on amount invested and period of investment.
Here are few fixed income istruments available in India to invest;
- Fixed Deposits offered by Banks and Post Offices
- Bond issued by the Government Of India.
- Bonds issued by governement agencies such as NHAI, HUDCO etc.
Fixed Income instruments are low risk and low return investment options. These are generally taken by conservative investors, not interested takeing higher risk.
Investing in fixed income instrument is a good option if you want to protect your principal amount as its relatively less risky.
Gold and Silver
One of the most popular and widely used invesment is putting your money in Gold and/or Silver for a long-term period. You can also invest in jewellery and Gold ETFs.
In case of urgent requirement of cash, you can easily get a GOLD LOAN from a nearby bank or financial institution.
Know your risk tolerance level and risk associated with investments
All investments have their own unique risks because there are chances that you may lose some of your capital.
Out of all available assets, stocks are considered as high risk and high return assets. If you have multi year investment perspective, then Equities are the best option.
After finding all the possible financial assets to invest, you need to assess your risk tolerance. This means how you react to volatility or uncertainty in the market and its impact on your investment.
In order to avoid unsystematic risks, you need to diversify your investments instead of zero-in on one or two stocks or sectors. By doing so your overall portfolio will not get affected if one or two companies are not performing well.
Remember, asset allocation depends on your age and risk tolerance. Allocating your money across differenet asset classes is termed as ‘asset allocation’.
Young professionals can allocate more in equity and less in other asset class. Preferably 70% in equity and 30% in other asset class. A retired person can invest 70% in fixed income instruments, 20% in equity, 10% in gold and silver.
After setting your financial goals, knowing different asset classes, and your risk tolerance level, it’s time to invest.
The best way to start investing is to decide which asset classes you want to own out of the available options.
Investing in stocks requires you to put your money for a long period of time to earn a satisfactory financial return.
If you have any short-term goals in mind, better to go for risk-free investments. Maybe keeping money in savings accounts, jewelry, recurring deposits and fixed deposits with a PSU bank and post offices will help you to get a risk free return in the short term.
If you have a passion to learn and adequate skills to do your own research, then you can start investing by buying fundamentally good stocks to build a portfolio for the long term. Otherwise, you can take mutual funds as a preferred way to invest money for the long term.
You can select 4-5 mutual funds based on your target and level of risk tolerance, to achieve your financial goal.
Do you need a financial planner?
Analyzing financial assets can be time consuming and confusing for first timers.
Therefore, it’s always a better idea to take the help of a financial planner who can help you in finding the best suitable financial assets as per your requirements.
A financial planner is a qualified expert who can help you in preparing financial plans to meet your long term financial objectives.
Nowadays there is no difference between a financial planner and advisor. Financial planning, helping clients to choose their investments, and managing client money are done under one roof.
You can take the help of a good full-service brokerage firm to get started. These full-service brokerage firms specialize in investment management, retirement planning, tax planning, insurance, and other aspects of the financial industry in addition to stockbroking service.
Now the question is when you can get the best financial advisor to help you in investing? To be very honest, these people will offer their service only when you have lots of money. Good advisors always concentrate on big clients, they don’t pay much attention to those they consider as small fish.
Now, what is the alternative for a common man to hire a professional expert to manage money? The best and most popular way is to invest in a mutual fund.
You can on your own or by taking help from a financial expert, can find 4-5 best mutual funds to invest based on your objective and risk tolerance.
Remember, you can’t build a fortune in a day’s time. If you don’t have a lump sum amount to invest, you can go for systematic wealth creation for the long term.
Systematic investment plans or SIPs offered by good mutual funds might help you to invest regularly for the long term to achieve your target.
As you are investing your own hard-earned money, we suggest you to keep monitoring it on a daily or weekly basis.