What is investing?
Investing is the way one can grow their surplus money saved from earnings. By investing, investors make their money grow and appreciate for long term financial goals. Ideally speaking, investing is a way of saving your surplus money for the future.
How to get started with our investments?
First of all, we need to find out our investor profile. This will help us determine what kind of investment is suitable for us to meet our investment goal. We can relate our investments to a vehicle that we use to reach our destination within a given time. We normally choose our mode of transport based on few factors such as
- The distance that we want to travel
- How fast and comfortably we want to reach our destination
- The kind of price that we are willing to pay for our travel etc.
Similar way, in investment we need to consider certain factors when we want to choose the type of investment for self and family. Mainly, there are four important factors that we need to consider and they are:
Duration: How many years do you want to invest or how long that you can hold on to your investment? This is called investment horizon and this investment horizon is broadly classified into three : Short term, medium term and long term. These three investment horizons are explained in detail in the coming paragraphs.
Returns: This depends on our investment goal. What return are we expecting from our investment? Are we looking for moderate return or high return? Remember, return on investment is always inversely related to the investment risk. So the investments made in high return instruments would always come with a price, risk!
Risk: There are different types of investments and they can be classified based on the risk involved as low risk, moderate risk and high risk investments. Investments made in debt instruments carry low risk and relatively safer than other type of investments. Equity investments are high risk in nature and volatile with the market movements. We need to consider our risk appetite while choosing our investment. Ideally, you ought to change attitude towards risk as you get aged.
Liquidity: Liquidity is an important factor in any investment. Many investment plans come with a compulsory locking period. Although such products offer better returns, we need to ensure that if we are prepared to hold on to such investments for certain period or not. We should decide to what extend we could expose our investments to such products.
Why do people invest?
As mentioned above, people make investments to meet certain financial goals in life. One can have short-term financial goal, medium-term financial goal or long-term financial goal. Let us understand each one of them clearly now.
Short-term objectives: As its name implies, these investments come with a short-term objectives – varies from few weeks to 2years– and relatively for smaller amount. Investments with short-term objectives are generally for meeting short-term goals. For example, short-term investments for meeting domestic holiday trip expense or accumulating fund for buying something that we wanted to buy in the past but postponed for some reasons.
Medium-term objectives: Investments made for a duration of up to seven years is considered as medium-term investments. People make these investments to meet their mid-term objectives where relatively more money would need to be accumulated towards the end of the investment term. People opt for mid-term investments to meet expenses for buying relatively more expensive items.
For example: You can go for mid-term investments to accumulate fund for buying new vehicles, to meet expenses of overseas trip for pleasure, for meeting educational expenses or to keep fund for future contingency expenses for self and family members.
Long-term objectives: Investments made with these objectives are meant for longer period, usually more than 7 years. Insurance investments made in retirement funds or child protection plan are some of the most common long-term investments. Long term investments are less volatile in the market hence it is much safer than other type of investments.
Investments made in insurance policies would usually mature after 10 years or 20 years. People invest in long-term investments with a long-term objectives in mind such as investment for retirement, children’s education and marriage fund or just want to create wealth for their safe future.It would be ideal to keep some portion of long term investments in good performing mutual funds along with your existing insurance policies to balance ROI.
We need to follow certain rule when are planning to invest. We should have combination of all type of investments so that we can balance our return irrespective of the market movements.
Goal Setting: This is the first and the most important steps in any investment. We ought to set our investment objective very clearly for each investment term and each investment should have its own goal and plan from the beginning. It is wise to exit from an investment when our planned objectives are met even before the deadline that we set for that investment. Our type of investments is largely depending on our investment goals.
Risk appetite: Fundamentally there are three types. High risk, balanced risk and low risk investments. Ideally, we should have all the three types of investments in our kitty so that we can balance our overall return that we make over a period. The ratio at which one needs to invest in these types of instruments would vary depends on each person’s risk appetite, age, investment term etc. Ideally one should have better equity exposure at younger age and slowly reduce that portion as that person getting aged over the years. As a thumb rule, we can find out the amount of equity exposure that you should have out of total investments with the following simple method.
Minus your age from 100 and ideally that should be your equity exposure out of your total investment. For example, a 30 year old person can keep 70 percentage of his/her total investment in to equity at the beginning and slowly reduce that part over the years. Review the investment once in 6 months or one year and balance the ratio periodically. However, there is no hard and fast rule that everyone should stick to this method as each individual’s risk profile is different.
What types of investments are available?
Equity: Large-cap, Mi-cap, Small-cap funds and ELSS are some of the most popular equity investments where equity portion ranges from 80% to 100%
Debt: Bonds, debentures, Certificates of Deposit, Government securities are some of the most common debt instruments in India. Out of this, G-Secs market holds a major portion of total market capitalization.
Balanced fund: Balanced fund are the combination of both Equity and Debt instruments. Most of the mutual fund investments do follow this principle for their investment. Balanced funds offer the benefit of both equity and debt and became the most preferred choice of average investors these days. Each Asset management company has different types of balanced funds introduced in the market.
Research about Investments: We should do enough home work before we venture in to any type of investments. Equity investment requires a lot of understanding from your side to get it right. Understand the basics of investment. Go through the portfolio composition and performance of each investment & compare our choice of investments with other identical investment plans in the market. Get investment advice from Authorized Financial Advisers, investment planners and other experts in the field, as and when required. Understand which sector is doing better in the market at the moment and choose your fund accordingly. It is a good idea to invest in cyclical and seasonal funds at some point of time during the year.
Spread investment risk: Never invest the entire money into one type of investment. Spread the risk across the different investment options available. Choose funds that invest in companies of different sectors. Balance your risk by investing some portion in low risk investment plans as well.
Read :Where Should we Put My Extra Money?
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