Investment is a scary topic for a lot of people. Statistics show that only 3.7% Indians invest in the equities market. Most people prefer to hold onto money as a precautionary motive. This motive has more serious repercussions than meets the eye. Warren Buffet, one of the most prominent investors and business tycoons in the world once said, “If you don’t find a way to make money while you sleep, you will work until you die.”
The only way to beat the odds is through investing your hard earned money in various financial instruments. The first step is always the hardest, but take consolation in the fact that once you commit yourself to it, you have already taken a step in the right direction.
WHY SHOULD YOU INVEST?
Investing money is a continuous process of learning along with sharpening your skills to implement what you’ve learnt. Through investments, your money grows by compounding. The very definition of investment is to buy financial instruments or assets to generate returns. So no matter how young or old you are, it is always a good idea to learn how to invest your money.
Investments are fundamentally a way of injecting more money into the economy. It promotes economic growth in the country and improves productive capacity of the economy.
Needless to say you can probably already tell how impactful investments can be.
HOW TO INVEST:
Investments require patience, studying and analysing to get the best out of it. Like any tool, it can be used to gain or poorly used, to incur a loss. Here are some simple steps to invest wisely:
1. Have a game plan: The first step is to start saving money out of your income to prepare for investments in the long term. Saving money is a great way to secure your future.When you have enough money to invest, start to learn about investing and the different kinds of securities there are. Make sure you have both short term and long term goals in mind. Based on that you can decide how much you can aim for realistically. For that you need to know step 2.
2. Conduct a risk assessment: Different kinds of investments yield different kinds of returns. It is called the Return on Investment (ROI). Usually High risk investments have higher returns and vice versa. More often than not people go for riskier investments in the long term (such as stocks) and less riskier investments in the short term. Make a comparative list to see which level of risk suits you best and aligns with your goal according to a realistic time frame. Choose your portfolio according to that. To identify what suits your risk level, a rudimentary knowledge of different financial instruments is needed.
3. Decide where you want to invest: There are many kinds of financial instruments for you to invest in. First you must understand the difference between Money Market and Capital Market instruments. Money Market Instruments are short term securities which mature within a year while Capital Market Instruments deal with long term securities whose maturity period is over a year. The following are some instruments to invest in:
a. Mutual Funds and Fixed Deposits- The first thing a person with an income should do is to set up a fixed deposit. A FD is a product that is offered by banks to invest money at a fixed rate of interest with annual payout options. Mutual Funds are pools of money collected by investors that then invest your money based on your goals and portfolio expectations. It gives new or small investors an opportunity to invest in equities, bonds etc that helps them diversify.
b. Equity Markets- Equity is the most popular kind of investment. It is commonly known as the stock market and essentially helps people to buy and trade shares of companies both private and public securities depending on the kind of stock exchange or platform. It is a very crucial part of the Capital Market. Exchange Traded Funds (ETFs) are also becoming a popular part of the exchange market. They are a collection of commodities traded on the exchange and are very popular for new or passive investors.
c. Bonds- Bonds are debt instruments issued to the holders. There are two common types of bonds: corporate and municipal bonds. The interest is payable at fixed intervals. These are considered extremely safe although the returns are also very minimal. As bonds can be sold, their value fluctuates until maturity.
d. Commodities Market- This constitutes investments such as gold and ForEx (Foreign Exchange Market) a commodities market. These assets are very illiquid (not sold or converted to currency easily) assets although that is because the ROI on these items are extremely high.
4. Diversify your portfolio: It is the oldest trick in the book to diversify your investment portfolio to gain comparative advantage over others. Only investing in one kind of market is not the best decision. A diverse portfolio is the sign of a learned and informed investor. Another rule of thumb is to avoid leveraging (Using borrowed or loaned capital to make investments. It may sound enticing but in reality it is a slippery slope).
5. Invest Regularly: This is the most important step of all. Investments are not a one time thing that can be done and dusted. It is a continuous process of evaluating and re evaluating your portfolio to optimise it according to market trends.
With these tips in mind, we hope you have a pleasant time investing.