What is Investing?
Investing is the act of allocating your money and resources into diversified assets in order to generate income, wealth or grow your assets. It is used for long-term wealth creation and funding your financial dreams. It does not require one to be a seasoned investor; it is essential to understand the principles of investing to understand how it works.
Principles of Investing
- The risk/reward relationship: Every investment is accompanied by its share of risks. Risk and reward are directly correlated. An investment with a higher reward has a higher potential risk involved.
- Diversification: Investing revolves around the principle of "spreading your bets." This means that allocating your money across assets and industries helps you reduce the impact of the failure of a single investment.
- Compounding: Long-term investments grow on the principle of compounding, which lets the earnings of your investments earn more return with time.
- Disciplined research and analysis: Unlike speculation, which includes putting your money in fiscal instruments without any research or analysis, investment is a detailed analysis of financial instruments that promises the safety of the principal and a reasonable return.
Why Should You Invest?
- Achieving financial goals: Investment is one of the best routes to help you reach your financial milestones, such as:
- Educational planning
- Retirement planning
- Major Life experiences
- Beating inflation: Money saved in savings accounts often is not enough to beat inflation in the long run. This means that the purchasing power of your saved money decreases in the long run. Investing in assets can provide growing returns which can beat the rate of inflation.
When to Start Investing?
Start investing as early as possible. It is not necessary for you to earn a professional salary to invest. Early investments not only help your principal grow into a healthy corpus over time but also help in maintaining a disciplined habit of investing periodically.
For goals such as investing for the education of your children or retirement, it is never too early to start. However, note that it is never too late to start either. Allocating small amounts of money in the long run can help you create a considerably large corpus.
Example: You start a systematic investment plan (SIP) of ₹1000 in a mutual fund when you are 20 years old. You keep it running till you are 50 years old. Assuming that the rate of return is 15%, you will have accumulated ₹56.3 lakh in 30 years. Although the annual rate of return does not remain constant and depends on market performance, a long-term investment can generate a large corpus. You can use an SIP calculator to calculate the returns on your investments.
Where to Invest?
Most beginners often leave the thought of investing because they are unable to decide where they should invest. Before understanding the asset classes, let's look at factors to consider before choosing an asset for your investment.
Self Assessment
- Before investing, define your goals. Ensure that your goals are measurable.
- Decide on a time horizon. This reflects the duration of your investment.
- Assess your risk tolerance. Determine whether you are a conservative, moderate or an aggressive investor. Ensure that your risk tolerance aligns with your goals and the duration of investment.
- Consider your demographic and geographic factors. Investment plans for NRIs should be chosen based on the country they currently reside in, tax implications, country exposure and their future plans for settlement in that country.
The following table describes the major asset classes, the risk involved and their beginner-friendliness.
| Asset Class |
Definition |
Risk |
Beginner-friendly |
| Cash and Cash equivalents |
These include safe and accessible assets such as bank deposits. They are highly liquid in nature |
Low risk |
Safest asset to preserve capital, albeit with inflation risk. Generally, the first asset an investor has access to. |
| Gold |
Includes Sovereign Gold Bonds, digital gold, and gold mutual funds. |
Low risk |
Gold is considered safe due to its ever-appreciating nature. Investing in gold is considered beginner-friendly due to its accessibility, usage and mass ownership amongst indian households. |
| Fixed Deposits(FD) |
Includes a fixed sum invested with a bank for a fixed amount of time at a fixed interest rate. |
Low risk |
The deposits are locked for the tenure of the FD, but guarantee a return based on the interest rate provided by the bank. Early investments generally start with FDs, as they guarantee a return to the investor. |
| Bonds |
A marketable security which represents a loan taken by any institution(company or government) in exchange for regular interest paid to the purchaser of the bond. |
Low to moderate |
Carry interest rate risk. Provide a steady interest income to the investor. |
| PPF (Public Provident Fund) |
A government backed long term saving scheme which offers a fixed interest rate at a 15% lock in period. |
Very low |
Due to its government-backed nature. Best investment for salaried individuals. It also offers a deduction under Section 80C |
| NPS(National Pension Scheme) |
A government-based retirement scheme that invests across equity, corporate bonds and government securities. |
Low to moderate |
Less risky due to the government backing, but performance depends on the market. Mandatory 40% annuity on exit limits flexibility |
| Mutual fund and ETFs |
Mutual funds pool money from various investors to create a diversified portfolio. ETFs: ETFs also act as baskets, but are traded in the stock market. |
Moderate |
Lower risk than individual stocks due to professional management and diversification of assets within the basket. Often considered market-friendly, as they let you invest in diversified assets as a beginner. |
| Child plans |
Insurance combined with investments in products designed for long-term goals like education or marriage |
Moderate |
Provides security due to insurance and growth with investments. Suited for parents with a particular goal. |
| Equities (Stocks) |
Equities can be defined as buying a tiny piece of ownership in a company. |
High |
Prices can swing depending on the economy and the performance of the company. Seasoned investors often invest in stocks. Beginners can invest if the focus is on investing in blue-chip companies. |
| ULIP |
Insurace+ Market-based investment. Premium is split between insurance and funds. |
High |
High volatility due to market-based returns. Can be complex in nature. |
| ELSS |
A class of mutual funds investing primarily in equities with a mandatory 3-year lock-in period. |
High |
Highly Volatile due to market-based returns. Although less liquid, an SIP can make it beginner-friendly and easy to understand. |
| Alternatives and specialized |
Does not include traditional stocks or bonds. Include advanced strategies like short selling or betting on currency movements. |
Very High |
Needs complex strategies, analysis, research and experience. Lack of regulation can lead to high losses. For beginners with no prior experience in investing. Often restricted to wealthy accredited investors. |
| Crypto-currency |
Digital assets such as Bitcoin and Dogecoin. |
Very High |
Constantly fluctuates as per the market. No regulatory framework in India, and they are taxed at 30%. Extreme volatility and regulatory uncertainty. |
Assess yourself and choose the best investment plan as per your goals, plans, and risk-taking abilities.
How to Invest?
After assessing yourself, choose an investment vehicle that suits you the best. Ensure that your investment portfolio is diversified. You can then choose between two investing strategies:
- Buy and hold: You buy the assets and hold them for the long term despite market fluctuations
- Market timing: You time the market and buy and sell assets as per market fluctuations.
Things to Keep in Mind While Investing
Along with a strategy that matches your investing preferences, keep certain things in mind to minimise risk and develop a healthy corpus.
- Ensure you invest regularly, even during market fluctuations, to maximise compounding and reduce the average cost of your assets in the long run.
- Research well before investing in any asset. Check performance over the years and compare with other assets of the same category.
- Periodically review and readjust your portfolio to ensure it matches your future goals and plans.
- Sell if an investment no longer matches your future goals, is consistently performing poorly, or the volatility exceeds your stress threshold.
Conclusion
Investment has become a crucial part of wealth creation and future planning in today's world, which is highly volatile, unpredictable and unstable. Long-term investments in such environments not only provide protection today but also provide financial security for your future. Starting small, starting early and staying consistent with investments is a roadmap to a financially stable future.
FAQs
-
What are the different types of investments available in India?
Some common investments include mutual funds, fixed deposits, public provident funds, the National Pension System, and gold. You can check and choose
safe investments with high returns as per your financial goals.
-
How do taxes affect my investment returns?
Different types of investments are taxed in different ways. Depending on the investment type, you may be taxed on interest earned, dividends or capital gains when you sell the investment.
-
Are there any safeguards to protect beginner investors?
Yes, safeguards are in place to protect beginner investors in India. SEBI is tasked with regulating investors through rules on fair trading, broker conduct and mandatory disclosure.
-
How can I track my investment progress?
Track your portfolio based on your financial goals. Try not to focus on short-term gains or losses in order to ensure that your investments can reap the benefits of long-term compounding.
-
What is the difference between trading and investment?
Investment refers to directing your money towards assets for long-term wealth creation, while trading includes buying and selling securities on a short-term basis to capitalise on short-term price movements.
-
Can investing beat inflation?
Various schemes have the capacity to generate a corpus which can beat inflation over a long-term investment. This is due to the power of compounding and rupee cost averaging.
Generate wealths Earn 1 Cr# in maturity with Zero LTCG tax¶
Double tax savings^ On premiums (under 80C) and on maturity (under 10(10D)
Compare & Choose 30+ Plans and 150+ Fund options
