Finance Essentials

Basics explained: How to start investing

26 Aug 2015 06:08

Did you know you can earn money from your money? No? It is simple. You just invest your hard-earned money in different kinds of assets or ventures, and enjoy a good interest income. Or better yet, sell it at a higher rate in the future and earn a cool profit.

This is what investing is all about. And everyone should invest to secure their future.

 

Let us have a look at eight things that you must keep in mind before you start investing:

1. Set investment goals

Before investing, it is essential to have a financial plan with a well-defined target that you expect to achieve over a given time span. It could be something like saving for further education, buying a house or car, or simply to save for retirement. Whatever you wish to achieve should determine the amount and type of investment.

 

2. Select investment instruments

Once you have finalized your goal, you will have a better idea of how much return you want. Depending on that, you will have to select amongst a basket of investment options like stocks, mutual funds, fixed deposits, insurance schemes and so on. Remember, you just need to find a starting point. Over the years, it is better if you expand your investment portfolio and diversify across assets. For example, you can start investing Rs 2,000 per month in a recurring deposit or Systematic Investment Plan (SIP). As your income grows, you can start investing more in a bunch of stocks, a fixed deposit, some mutual funds, public provident fund and so on.

 

3. Invest for a definable reason

Make sure you have a valid reason to invest in any stock share, enterprise, fixed deposit, real estate, bullion or any other asset class. Do not simply invest in anything just because its value has risen over time. It is imperative to ask yourself the question ‘why’ you should invest in a particular asset. The answer to that should be a logical reason based upon hard facts and not upon hearsay.

 

4. Understand before investing

You need to have a sense of understanding of the asset you are investing in. This will help analyze the quality of your investment when it is doing well and when it’s not in the long run.

 

5. Safety net

Don’t put all your eggs in a basket. Ensure you have a safety net. Low-risk options like fixed and recurring deposits can help you in this matter. However, don’t put all your money in low-risk investments. Otherwise, your overall profits and return will fall too. You may not be able to meet your goals. Suppose you decide to invest Rs 10,000 per month. You can keep Rs 2,000 aside in a recurring deposit and Rs 5,000 in a PPF account. The remaining, you can invest in high-risk assets like stocks and mutual funds. Thus, even if your stock investment gives you no returns, your RD and PPF investments make up for the loss.

 

6. Be patient

There will be good times and bad times. During the bad times, be patient. It may be nerve-wrecking to see the value of your investments erode, but you need to ride market-swings. Don’t bail out at the first hint of trouble unless you are doubly sure. It could just be a temporary cycle.

 

7. Riskier the investment, higher the potential payoff

Stocks, currencies, commodities are investments prone to daily market swings. They are considered riskier, but offer higher rewards. Of course, the potential for loss is greater too. Risking too much could prove costly if not hedged properly.

 

8. Have an emergency fund

Before committing hard earned money into investments that carry risks, it is advisable to keep some aside as reserve. You can fall back upon these in case of emergencies. Other than meeting living expenses and sudden medical requirement, an emergency fund acts as a financial safety net in case investments take longer than expected to give returns or if they become a victim to markets swings.