The renowned American investor and business tycoon, Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.”
And, one of the best ways to gain while you are rolled up in a blanket is by investing regularly. And, if age is on your side, the potential of risk-taking as well as profits is generally high. Some of the best and most popular vehicles of investment today include equity, mutual funds,ETF's, fixed deposits, equity and commodities. With new asset classes like cryptocurrencies taking centre stage.
Assessing risks and returns
Investing is a game of risks and returns. Every investment involves an element of risk - small or big. In theory, the higher the risk, the more is the expected return and vice versa.
However, two of the factors you should take into account before deciding to invest are time period and the amount of money you can afford to lose. If you opt for a low-risk option like a fixed deposit at a bank or a post office scheme, you are likely to get modest returns. Equity on the other hand can fetch huge earnings if invested wisely. Either way, you need to weigh your risk against returns as well as financial goals to see what works out best.
Things to keep in mind
Prior Debt: Before you start putting aside money to invest, it is important to review your debt. If you have a lot of credit or loans, then it is better to settle it first. This is because the extent of return from the investment might not be able to outpace the rate of interest you will have to pay on your debt.
Emergency fund: In case you are looking to invest big and infuse most of your money in real estate, commodity trading, or even the stock market, you should keep aside a contingency liquid fund for a rainy day.
Commission and fees: If you are looking to invest in equity, a demat account is imperative. This is usually in dematerialised or electronic format and is used to hold shares and securities. You can either choose a demat account offered by banks like HDFC or ICICI Securities, else, you can also opt for an online stock trading application such as Zerodha or Groww. However, before you take a call, it is essential to compare the commissions charged.
Setting a process in place
One of the first questions you need to ask yourself before investing is why you want to do it. Is your goal to have a secure retirement fund? Is it to fund your children’s education? Is it to travel the world? Goal setting can help you in figuring out the kind of investment plan that can work for you. For instance, saving for your childrens’ college fees may require you to place 60 percent of the money in a low-risk investment plan and setting aside the remaining 40 in a high-risk high-return investment vehicle. So, it boils down to choosing the instrument based on risk-taking capacity and expectation in terms of returns. This is both subjective and unique to every individual.
The next step is to assess the availability of funds for these investments. If you have very little money at your disposal, you can pick out modes that do not require a lot of capital. Keeping in mind these aspects, you can do some research to find out the type of financial instruments that meet your needs. This necessitates some reading as well as review.
In addition to this, it is significant to track and keep a note of the viability of instruments.
Comparing the rates of return, consistency, and costs is a must. If you find your portfolio performing as expected, hold onto it. If not, you need to step back to the drawing board, reassess and reinvest in a different one. Identifying what is working and what is not helps make better decisions.
This entire process may take both time and effort. Looking into financials like P&L statements, balance sheets, and other market predictions will enable you to make accurate judgements.
Lastly, the ground rule for making smart investments is to diversify your portfolio. A good mix of different asset types like mutual funds, equity, real estate, commodities, fixed deposits is the way to fo. This allows you to control your risk exposure based on your age, risk-taking capacity and financial goals.
Stay tuned for subsequent parts in this series.
Edited by Roshni Shroff
Some resources and links to help you learn more about investing:
Investing learning course