When we earn a certain amount of money, we should not use it completely as it may lead to our misery in old age. We find options where we can invest our money so that our hard-earned income is safeguarded as well as it increases at a steady rate. So, in this article we will deal with all the investment basics you should know as a beginner before investing.
Investing for beginners can be quite tricky because of the variety of options it has, the varying rules and regulations, different tenures, risk, minimum amount, taxes implied, withdrawal and closure facility, eligibility, etc. The first thing an investor needs to do is to look upon their financial goals, risk-taking capability, and patience level to get the best returns of even small investment.
Investment Basics You Should Know As A Beginners
What Are Investments?
Investments are the act of using the money to acquire a particular asset for future gains. Investments are done for a variety of reasons such as plans for pension, saving for unforeseen expenditure, growing your wealth, protection of surplus money.
There are two ways through which you can earn money via investments.
In the first method, you can buy an asset to sell it afterward. The difference in price when you buy and sell will give you profits.
In the second technique, if the money is invested in return generating plans, the money will keep on growing, and hence you will earn the profit.
When a person purchases goods as an investment. He does not purchase it to consume the goods rather it is done to increase the wealth in the future by selling or getting returns from it.
Why Is Investments Necessary?
Just earning and spending money is not enough in today’s world. You also need to save some money for an unprecedented future. You work quite hard trying to satisfy the needs of your family. But, that may not be quite enough for completely your financial goals or having a secure future.
Keeping your money in the banks saving account does you no good; the current inflation rates stand at around 6% per annum and the saving account gives you an interest rate of not more than 3-4% so technically speaking, your money depreciates over time if you do not invest it in the proper place.
Type Of Investments In India
Investors in India have multiple options to choose from. Each person has its own life goal, financial needs that need to be fulfilled.
Investment types have been there for ages, now many new investment schemes have been launched countering with greater returns, better investment strategy, lesser risk, and higher compatibility for the user. So, as a newbie see what is more useful to you.
The most famous investment tool in India is Stocks that represent part ownership in the company. When you buy stocks, you start earning with the company. It gives you the title of the shareholder for the company.
A company for its growth launches new products that will require a huge workforce and factory installation. For carrying out these a company will require hefty funds.
The company looks for loans with banks but in-turn they have to pay interest with it. They look for ways where they can get the funds but they do not pay interest.
One legal way to do this is by issuing shares. The company adds partners with its organization, in turn asking them to provide funds.
The company adds a partner with the organization by issuing shares, the investor purchases the shares, more the number of shares you hold is the percentage of your ownership with the company.
Basically, there are two types of share, common and preferred stock. Buying common stock gives you a special voting rite, which can be exercised during certain decisions. In preferred stocks, you earn certain dividends even before the dividends are issued to other shareholders.
2. Mutual Funds
Mutual funds are an investment where various people put the money and then the schemes invest in securities such as stocks, bonds, gold, and short term debt.
Mutual funds are broadly classified into four types:
- Stock Funds:– Schemes under this invest in stocks of multiple companies. In this also it is diversified based on different goals.
- Bonds:- Schemes investing in bonds tend to have a higher risk than the rest of the mutual fund’s type, but they also aim to provide higher returns.
- Money market funds:– These funds possess lesser risk and invest only in the companies issued or mentioned by the Indian government.
- Hybrid Funds:– These schemes is the perfect blend of stocks and bonds to giver higher returns at a lesser risk.
3. Fixed Deposits
A fixed deposit unlike the above two does not vary in returns. It gives a fixed return until the maturity period. They are offered by almost all the cooperate banks, for the different periods and at a different rate of interest. They are best for people not wanting to bear any risk on their investments.
Fixed Deposit rates are determined by the banks and mostly depend on the current market conditions. Their interest rate increase in the inflation period and decreases in the depression phase. They also help you save a lot of taxes and have a certain lock-in period.
4. Recurring Deposits
These can be said as a SIP investment for fixed deposit; Where you can invest a minimum amount each month for a predefined period. Recurring Deposits are offered by all the commercial banks and post offices and then interest rates depend and are changed depending on the institution offering it. RD helps you build a certain corpus for a specific time.
5. Public Provident Fund
It has a low risk and gives stable returns. If the safe-keeping of your money is the prime goal you want to secure, then PPF is best for you. It is usually a long term investment giving stable and high returns
PPF comes with a security lock-in period of 15 years. During this period, the depositor cannot withdraw complete funds. After the maturity, the period of the policy can be extended for more 5 years.
The minimum investments that can be made are 500 and the maximum is 1.5lakhs. In this fund, the investor can either do a lump sum payment or in SIP. The SIP investments can be narrowed only up to monthly payments
On can also get loans against their deposits in PPF. The loan can only be availed from the start of 3rd year to the end of the 6th year from the starting date. Loan tenure can be a maximum of 36 months and only a total claim of 25% can be made on the investments.
6. National Pension Scheme (NPS)
Indian Government launched a scheme to help to counter the growing concern of the senior citizens, which is known as the National Pension Scheme.NPS is a contributory scheme where each employee contributes a part of his income each month in NPS.
NPS is a market-linked scheme managed by the fund managers, contributions are collected and the money collected grows concerning the market and then the employee receives a monthly pension after his retirement.
Flexibility and liquidity are offered under NPS via two different tier account.
Minimum deposits for tier 1 start from 500Rs and minimum deposits for tier 2 start from 250Rs. Where you voluntarily deposit this money each month through your salary in NPS.
7. Employee Provident Fund (EPF)
The Employee Provident Fund (EPF) is a scheme launched by the government in 1952 that helps people save up a sufficient corpus for retirement. EPF ( Employee Provident Fund) is managed by the Employees’ Provident Fund Organization (EPFO).
According to the scheme, every month the employee will contribute 12% of their basic income towards EPFO. The employer matches this amount and contributes to EPFO.
When you retire, you get a lump sum amount of the investment, you and your employer have done along with interest.
The government has control over EPF and gives an interest over the contribution made.
As per the 2018-2019 Union Budget, new women employees could contribute only 8% instead of the normal 12% towards their EPF account for the first three years of employment.
8. Real Estate
This option can be the investment option giving you maximum returns. It is a highly profitable investment depending on how, when, and where you invest in.
Real estate can give you multiple benefits; first you can earn by renting the real estate till the time you get a great price to sell the real estate. After you get a good price higher than what you spent, sell it and then again invest the money to buy another property and then the cycle continues.
How to avoid the hassle of keeping the Gold, by buying an E-gold. Gold prices have been surging quite high recently and are expected to rise even further, so buying gold can be also a good option for people looking for diversification.
Add these investments in your portfolio to diversify and gain from multiple sources. You can add these both option, physical real estate and E-Gold to increase diversification in your investments.
What Should You Remember Before Investing Your Money As A Beginner?
Investing your money in the wrong place can lead you giving financial losses. You as a beginner should analyze your financial goal, the money you wish to invest, the risk you are ready to take, the time you can keep the money for, etc.
There are certain factors you need to look, before investing your money:-
A young investor has few responsibilities on their shoulders and has a longer period to keep their money invested. With the planning for the long term, you can keep investing a small amount and then increase as per an increase in your salary. So, for younger investors, it is better to choose an equity-related investment vehicle as they give better returns. Older citizens can choose an investment giving good returns at a lower risk.
You can either have a short term or a long term goal. In case of a short-term goal, you should prefer investing in safer investments giving good goal returns. In case of long-term goals go for an investment giving higher returns. Investment goals can even be renewable and non-renewable goals. Where non-renewable goals refer to saving money for non-avoidable circumstances such as children’s education, loan repayment, etc. For these investments, you should go for investments with low risk and good returns. Whereas renewable goal will refer to where the financial needs can be pushed.
Before you decide on the investment you wish to do, you need to look at your profile. Factors such as your earning, the debt amount, rents, expenses also have a huge effect. It also depends upon the willingness of risk to be taken. An investor wanting to play safe can invest in secure investment vehicles whereas risk-takers can play with higher risk.
How To Plan Investments?
Do these things before deciding on the investment strategy and investment place.
- First, do adequate research.
- Do not fall for schemes promising higher returns in a short period.
- Review your stocks periodically.
- Look for the tax that will be applied on your investments.
- Avoid complicated investments, go for simple investments.
Process Of Investing Successfully
In greed for earning high and fast returns we forget the process, the process is the most important part which you should follow as a beginner to get real benefits and rewards.
Almost everyone who has ever earned a good amount of cash by investing has started by reading books. Reading will exercise your mind as you read more about investing. When you start reading about a thing, you gain a deeper understanding of the topic and in turn, you apply the same knowledge in the real world.
ii. Investment Basics
As you start reading, your investment basics get more substantial, as you get stronger in this topic, you know the field where you can gain maximum profit according to your work style and hence earn amazing profits.
iii. Investment Rules
Each individual is unique and he/she only can frame their set of investment rules. Once you have a deeper knowledge of the process of investing, you frame a set of rules for yourself which you should never cross during the journey
iv. Investment Decision
The decisions you make at crucial times are the reason which will differentiate you from the mass. These decisions can have an overall impact on your investment career. You will lose, you will win but more than that, you will learn immensely.
This is what everyone expects after investing, profits, or returns. In many cases, this depends upon the market condition; hence the returns vary in such cases, but when you invest in places unaffected by market uphill or downhill, you earn steady returns. Multiple times you will see success and more you get involved in investing.
Every successful investor has faced loads of failure and multiple success, they learn and they move forward. Even we should do the same, only after some adequate investments and multiple experiences you will learn about the fluctuations in the market.
What Is Meant By High Returns?
In India, there are many sources through which one can gain interest higher than 7-8% percent per annum. Some equity funds or companies have even given interest rates in double digits.
There are certain factors you can check to see if the investment type gives high returns.
- Check Average Inflation:– In the last decade, the average inflation in India was about 7.3%. For an investment to give good returns, it should have average returns greater than 7.3%. Inflation is the surge in the price of goods and services in a period. So, 7.3% inflation rate means that on an average the price of goods and services have been increased by that percentage.
- Check Index rate:- India has two major indices – Nifty and Sensex. We can check how much the indices have grown in the past few years, so you can get a fair idea of how much your investments can give in the long term. For example, in the past decade, the Sensex has been rising at a rate of 13.8%, so on average the companies preceding have also risen by the same percentage and hence your investments will gain good returns in a long term.
- Check Govt. Bond Yield:- After we have seen the average returns on the equity-related investments now we should check on the debt funds yield. In the last decade, Government bonds have produced returns close to 7.39%.
- Check Savings deposit returns:– all we mentioned above were investments having good risk factors. Savings deposits give returns about 3.5 to 4.0 percent at zero percent risk. Hence, this often acts as a benchmark for any investment strategy.
What is Small Regular Investments?
You don’t need to have a huge corpus at the time you start investing. Investing small amounts for a while may help you build the same amount of money.
For a corpus of about 1 crore can be built in just 17years by investing in small-cap funds by putting close to 7-8 thousand a month, which amounts not more than 80 to 95 thousand in a year.
There are many amazing funds available in the market, with goods returns and some having a good record for producing excellent reviews.
What Is The Power Of Compounding?
You invest a particular amount, you either get a fixed return or the returns are based on market conditions. Then the interest is calculated for the principal amount for the first year, but in the second year when the interest has to be calculated, not only the original principal amount but also the interest you earned in the past year is taken into considerations.
Hence the principal amount as well as the interest earns its interest in compounding. In compounding, money keeps increasing at a generic rate rather than an arithmetic rate, hence more beneficial for the customers.
Let’s take an example if you have invested 1Rs at an average interest rate of 20% per annum, then your 1 Rs will turn into about 15Rs after the end of 15 years.
Here comes the twist, after 15 years these 15Rs will grow drastically, multiply more, and after the end of 30 years, your 1 Rs will now be over 257Rs. This shows the power of compounding, were in the long term you are bound to gain more than you ever thought.
Guide To Start Investing In India
Now, we will learn about the different aspects to start an investment as a beginner.
1. Start Investing Early
An important fact that we learned from the power of compounding was that our investments grow rapidly in the latter half of the tenure. So, the longer you keep the investment more it is profitable for you.
To achieve a higher financial goal, either we need to invest more in SIP or we need to start investing early. Either one might be hard depending on the amount of money you earn, hence investing less at an early phase will help you complete your financial goal.
2. First Eliminate Your Debt
To become financially free, the first thing you need to cut-off is your debt. Debt takes off loads of money through one’s earning. In some cases, rent and loans occupy about 75% of their monthly income. This is bad, so slowly and steadily decrease your debts and avoid taking any new loans.
So, for example, if you are cutting down your credit card loan with interest at 30% per annum, you are gaining about an income with 30%.
There are multiple types of loans which one avails:-
i. Personal Loan:- This type of loan is mostly given by banks to its customer to complete their personal needs. This also includes the finance companies giving loans for TV, Fridge, smartphones, etc. They are given without taking any security; hence the loan typically has a higher rate of interest.
ii. Credit Card Loan:– Credit card is a trap if you do not use it wisely. It should only be used in case of an emergency. Credit card merchants impose heavy interest rate if the money withdrawal is not repaid in the stipulated period.
iii. Student Loans:– This type of loan is given to the students and their families to cover the expenses of higher education. It has been quite popular lately among the students wanting to complete their studies abroad.
iv. Mortgages Loans: – Also known as home loans, this type of loan is given to people wanting to build or buy their own house but cannot afford the money. In this type of loan, the home you are building is taken as the security, and it is seized in cases where the customer fails to pay back for a long period. Home loans have the least interest rate among all the type of loans.
v. Car or Auto Loans: – Similar to a home loan, car loans have your vehicle as to the security; hence if you fail to do the payments, there is a risk of losing the car. They are also offered at a lower interest rate.
3. Pay Yourself First
A concept brought and popularized by Robert Kiyosaki in his book Rich and Poor Dad, he asks everyone to pay yourself (which means investing or spending money on yourself, which can make you rich in the long term).
An easy way to do it is to divert a portion of your earning into other saving accounts. From this savings account, you can invest in the proper investing places. This can help you invest more effectively than you would have done. With this, you also need to cut down your expenses so that you can transfer a sizeable portion.
4. Investment Diversification
You should not put all your eggs in one basket; similarly, you cannot have all your investments in one single place. As your portfolio increases, you must invest your money in multiple streams to reduce risk.
There is a risk of failure in each investment, so if all your investment is just put in one fund. In case of failure, you will gain nothing, all you will have is a loss. If you spread your funds in multiple streams so even if one of the processes fails, you will have other with high hopes of success
5. Mental Problems Affecting Investment
There are many common myths affecting people’s mindset before and after investing.
- I cannot Afford it:– It does not matter how much you earn. There is always a scope for you to invest. Certain investments offer SIP with minimum investments starting from 100Rs.
- I’ll start investing from tomorrow:– There is never a tomorrow, you shall start investing right now. You always think that you can talk with friends or experts and then start investing. There are now multiple apps, which can help you start investing within a few minutes.
- Equity is Risky:– Calculated risk can give you great returns. Today very few people know about equity, but equity is the only place that can give you double-digit returns. Read, learn, and start investing.
6. Investor Should Be Aware While Dealing With Broker
Places such as mutual funds, stock require you to deal with the fund manager or the broker who manages all your account. From setting up your account to transferring funds in different schemes/companies, closing your account, everything you do is managed by these brokers.
So when you choose a broker, you should be aware of multiple questions about your broker.
- The number of years of experience by the broker?
- Does he have the eligible qualifications?
- How many clients does he have/ and how have their investments performed?
- What is the charge taken by him?
- From where he has learned the business?
Major Responsibility Of A Broker
- Agreeing with the client or the sub-broker and client
- Maintenance of the money of their clients
- Delivery/ payment to be made with 24hrs of a payout
- Issue of daily statement and collateral utilization to clients
- Other duties specified under (Stock Broker and sub-broker) SEBI laws
Short Term V/s Long Term Investments
|Short Term Investment||Long Term Investments|
|The difference between buying and selling the investment is very low||The investments are kept for a longer duration|
|They possess a comparatively higher risk||They possess a lower risk in the longer term|
|Is more fluctuating, hence can gain you good profits||In the longer run, the investments fluctuate less and give stable and high returns|
|These cannot fulfill your lifetime financial goals||They will probably do complete your lifetime goals|
|More liquidity||Lesser liquidity, as the money is kept still for a longer time duration|
|No penalties to sell early||Charges and penalties may be incurred if you withdraw your money before maturity|
Risks Associated With Investment
1. Market Risk
There are three major types of market risk associated, equity risk, interest rate risk, and currency risk. In equity-related instruments, the prices of share change all the time; hence can gain and lose value at any time. Interest rate risk is applied to debt funds where the change in interest rate increases the risk to lose money. Currency risk is applied when your investment in foreign currency; hence the change in the currency of that company may be the reason you lose money.
2. Liquidity Risk
This risk is caused when you are unable to sell out your investments at a fair price. Some investments may even charge you a penalty for withdrawing your money before maturity
3. Concentration Risk
This risk is caused due to the concentration of all the investments in a single place. In cases when the investment does not perform, hence you lose money.
4. Credit Risk
To the investment such as bonds or any debt investment, there lies a risk where the company may not be able to pay back the money to you. Look for a better credit rating of the company when you choose to invest in debt investments
5. Reinvestment Risk
When you change your investment, the interest rate at the current bank can be less than that of the previous bank. Hence, you lose money in such cases.
6. Inflation Risk
There is a huge risk if your investments are unable to keep up with the inflation rate. Share give you protection against inflation by increasing the prices of the share they charge the customers.
7. Horizon Risk
In certain cases, you may be forced to reduce your investment horizon, like in loss of a job. In such cases, you might be forced to sell your investments at whatever prices available at that time to meet your expenses.
8. Longevity Risk
This risk occurs when you die before the maturity of your investments. Many investments give an option to opt for the nomination, where your descendants might get your money.
What Are Blue Chip Companies?
The blue-chip companies are the best and most well-reputed companies giving consistent returns in the past.
The category of companies sells the quality product to a very large base of people. The companies give low returns because they have already reached a peak in their sector. But these companies provide returns at very low risk.
Companies included in the blue-chip have a very high market base and their stock values are also quite high. Almost all the companies listed in Top 100 companies are included in Blue Chip. The normal investment horizon lies from 4 to 6 years in blue-chip companies.
Which Are The Best Blue-Chip Companies?
- Indian Tobacco Company (ITC) Limited
- Hindustan Unilever Limited (HUL)
- Reliance Industries
- Tata Consultancy Services (TCS)
- Oil and Natural Gas Corporation (ONGC)
- Housing Development Finance Corporation (HDFC)
- Eicher Motors
- Sun Pharmaceuticals Industries Limited
- State Bank of India (SBI)
How To Build A Portfolio?
A portfolio generally refers to all the investments that the investor has. Different investments lead to different kinds of risk, returns; hence people find it difficult to match this with their financial goals. However, if you think the other way by analyzing the financial goals and money you will require to attain them, then you can get a clear idea about the risk and returns associated with it.
When you have your goals written down, you can start thinking about the portfolio.
Differentiate your goals as short term, long term, or medium term. It creates a big difference when you wish to invest for the long term and short term.
In the case of the short term, the goals have to be completed in a maximum of 3 years. These investments can be fulfilled by fixed assets goal. You will get steady returns for the next 3 years.
For long term goals, you can look for equity-related investments. Mostly you can either invest in shares or equity funds. They depend on the market conditions and have high fluctuations. They may grow at a certain time or lose at a certain, but in the long term, you will surely gain high amounts of profits. The time horizon for long term goals is more than 5 years.
Where Not To Invest Your Money As A Beginner?
We learned above how and where we should invest, but in this section, we will look for places where you should surely avoid investing. They might assure you to give returns in the short term, but you will surely lose money in the long term.
i. Money Circulation Schemes (MCS), Multi-Level Marketing Schemes (MLM), Network Marketing (NWM), Self Employment Yojana (SEY)-
You get some money by making people join the scheme and doing an initial investment. So, the chain continues endlessly and everyone gains profit. But at a certain point of time, this chain breaks and causes heavy losses to everyone
ii. Chit Fund
Even here, people are fraud by making them invest collectively in a scheme, and they are promised in turn to gain a heavy return. In maximum cases, the promoter has been fled away from the money
iii. Unclaimed Deposits
Finance Companies take deposits from the public, promising them unusually high returns. Since high returns are unsustainable and unattainable, ongoing repayments of interest and deposit amounts depend and continue till the continuous and uninterrupted flow of fresh deposits. At some stage, when the flow of deposits gets stopped, the payments to the investors stop, leaving them at a place of nowhere.
iv. Plantation Schemes
Many companies offer the customer with a very high rate of returns by investing in plantations. These plantations are not listed under BSE, but here also the promoters have often fled away with the customer’s money.
v. Unbelievable High-Interest Schemes
Avoid investing in any scheme offering you unbelievably high interest or giving great returns in a very short period. These are often fraudsters and even the government will not be able to help you much.
Frequently Asked Questions(FAQs)
1. What is Investments?
2. Where can we Invest as a beginner?
3. Which investments give the highest amounts of return?
4. How much money should I keep in my savings account?
5. What does beat the market mean?
6. Do I need a broker to start Investing?
7. Which are riskier stocks or mutual funds?
8. What does it mean when you buy a stock?
9. Shall I start investing in a pension scheme from the age of 35?
10. What are recurring deposits?
Investing for beginners is not an easy task, you need to first identify your profile then search for investments suiting you. Even if you decide on one type of investment, it has thousands of sub-types to choose from.
Investment can be a thrill ride due to the adrenaline rush when the market fluctuates instantly. Timing is also a very important factor when you are investing. Start with 100Rs, but start investing as early as you can.
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