First of all, congratulations! Investing your money is the most reliable way to build wealth over time.
Investing essentials means the crucial things that one must know or have before investing their money into some assets. The first and foremost requirement for investing is to have knowledge about where to invest, how to invest, which assets to look into, and so on.
If you’re a first-time investor, we’re here to help you get started. It’s time to make your money work for you.
Before you put your hard-earned cash into an investment vehicle, you’ll need a basic understanding of how to invest your money the right way. Here are some of the best ways to invest money:
Stocks are investments in a company’s future success. When you invest in a company’s stock, you profit along with them.
Just as borrowing money is a part of life for most people, companies, and governments also borrow money by using bonds.
This popular investment vehicle tracks a market index and can help balance your portfolio.
Learn about exchange-traded funds, or ETFs, which trade much like stocks.
A bank fixed deposit is considered a comparatively safer (than equity or mutual funds) choice for investing in India.
Real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
Gold is one of the most preferred investments in India. High liquidity and inflation-beating capacity are its strong selling points, not to mention charm, prestige, and so on. Gold prices shoot up when the markets face turbulence.
However, there’s no one-size-fits-all answer here. The best way to invest your money is whichever way works best for you. To figure that out, you’ll want to consider:
- Your style
- Your budget
- Your risk tolerance.
Your style – How much time do you want to put into investing your money?
The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. We believe both styles have merit, as long as you focus on the long term and aren’t just looking for short-term gains. But your lifestyle, budget, risk tolerance, and interests might give you a preference for one type.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you’re planning to be an active investor.
To successfully be an active investor, you’ll need three things:
Time: Active investing requires lots of homework. You’ll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them.
Knowledge: All the time in the world won’t help if you don’t know how to analyze investments and properly research stocks. You should at least be familiar with some of the basics of how to analyze stocks before you invest in them.
Desire: Many people simply don’t want to spend hours on their investments. And since passive investments have historically produced strong returns, there’s absolutely nothing wrong with this approach. Active investing certainly has the potential for superior returns, but you have to want to spend the time to get it right.
On the other hand, passive investing is the equivalent of putting an airplane on autopilot versus flying it manually. You’ll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work — mutual fund investing is an example of this strategy. Or you could use a hybrid approach. For example, you could hire a financial or investment advisor — or use a robo-advisor to construct and implement an investment strategy on your behalf.
Your budget – How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with Rs.500. The amount of money you’re starting with isn’t the most important thing — it’s making sure you’re financially ready to invest and that you’re investing money frequently over time.
One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
Most financial planners suggest an ideal amount for an emergency fund is enough to cover six months’ worth of expenses. While this is certainly a good target, you don’t need this much set aside before you can invest — the point is that you just don’t want to have to sell your investments every time you get a flat tire or have some other unforeseen expense pop up.
It’s also a smart idea to get rid of any high-interest debt (like credit cards) before starting to invest. Think of it this way — the stock market has historically produced returns of 9%-10% annually over long periods. If you invest your money at these types of returns and simultaneously pay 16%, 18%, or higher APRs to your creditors, you’re putting yourself in a position to lose money over the long run.
Your risk tolerance – How much financial risk are you willing to take?
Not all investments are successful. Each type of investment has its own level of risk — but this risk is often correlated with returns. It’s important to find a balance between maximizing the returns on your money and finding a risk level you are comfortable with. For example, bonds offer predictable returns with very low risk, but they also yield relatively low returns of around 7-8%. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market on average returns almost 13% per year.
Even within the broad categories of stocks and bonds, there can be huge differences in risk. For example, a government bond or AAA-rated corporate bond is a very low-risk investment, but these will likely have relatively low-interest rates. Savings accounts represent an even lower risk, but offer a lower reward. On the other hand, a high-yield bond can produce greater income but will come with a greater risk of default. In the world of stocks, the difference in risk between blue-chip stocks like Infosys (NASDAQ: AAPL) and penny stocks like Reliance Capital.
What should you invest your money in?
Here’s the tough question, and unfortunately there isn’t a perfect answer. The best type of investment depends on your investment goals. But based on the guidelines discussed above, you should be in a far better position to decide what you should invest in.
For example, if you have a relatively high risk tolerance, as well as the time and desire to research individual stocks (and to learn how to do it right), that could be the best way to go. If you have a low risk tolerance but want higher returns than you’d get from a savings account, bond investments (or bond funds) might be more appropriate.
If you’re like most Indians and don’t want to spend hours of your time on your portfolio, putting your money in passive investments like index funds or mutual funds can be the smart choice.
The Finvestable bottom line
Investing money may seem intimidating, especially if you’ve never done it before. However, if you figure out 1. how you want to invest, 2. how much money you should invest, and 3. your risk tolerance, you’ll be well-positioned to make smart decisions with your money that will serve you well for decades to come.