Money, whether hard-earned, inherited, or even won through a lottery, is a prized possession. Money makes your life easy and increases your self-esteem. It wouldn’t be an exaggeration if we say that money is the key factor in our lives today. Though many may dub this as being a materialistic thought, that fact remains that humans are often judged by the amount of money they have or give.
With the inflation soaring, the money that you possess today keeps losing its value with time. Consider the standard example of a car. Ten years down the line, the amount that you require to purchase a mid-range sedan today would not be sufficient to buy a small sedan. The cost of living keeps increasing and over a period of time, the value of the money that you possess reduces significantly. Does this ring the panic bell? In fact, it should to some extent if you’ve been planning to keep your money in the form of liquid cash. It is always a wise decision to invest your money in instruments that offers better returns. The decision would remain wise only when the invested money remains safe and secure. Without any further delay, let me take you through the 10 things to remember before investing your money.
10. Money saved is money earned… Really?
Does this statement confuse you? It’s actually true and quite simple to understand. The money that you save today would serve as a source of revenue in the future, if properly managed. Money management is an art one must master for his or her own good. Keep an account of your expenses and liabilities. Avoid unnecessary expenses and make savings one of the top objectives in your life.
9. How much should you invest?
This is something where you are the best judge. Ideally, about a half of your income should go towards savings. This percentage contribution could be more when you are young and may gradually reduce as you age, since the expenses will increase as you go through the different stages in your life. At any point of time, at least 30% of your income should be towards savings and more importantly make sure that these savings are not used up for trivial needs. Remember that they are for the future.
8. What are the options?
To an aspiring investor, there are many options where he or she can route the savings. They come with different rates of returns and varying risk levels. Before you take that big decision take a risk assessment based on your age and future goals. If you are young, say in the 20’s your risk taking potential is higher which gradually reduces as you grow older. Similarly, your goals determine your risk tolerance index. This is a measure of how well can you cope up if there is a temporary negative impact on your investments. Your investment destination could be Equity-linked savings such as direct stocks, Mutual Funds, Terms Deposits with Banks and other financial institutions. Investment in rare metals and real estate is also an option.
7. What are the returns?
Investment in equity is known to give you the maximum returns provided you have the patience. The returns usually range in excess of the regular interest rates provided by most of the banks. Investments in certain commodities like Gold and Silver are also proven to be an effective savings option. Mutual Funds are known to give you returns that are balanced. In fact, even mutual funds have different strategies of investment based on the goal of the fund. It could be short-term capital appreciation or long-term saving instruments. As for the investment in the bank deposits, you can choose the tenure and get to know the return rate beforehand.
6. What should I be worried about?
Risks and uncertainties are part of life and some investment options are no different. While your bank deposits give you relatively fewer returns (which may not be sufficient to beat the rate of inflation), they are the safest. When it comes to investing in equities, there is a higher element of risk involved. If the stock does not perform, and the market perception is poor you can see a downward trend. Mutual fund investments are also not exempt from this uncertainty. Any investment option that is linked to equity markets carries with them a certain element of risk. Don’t panic, read on.
5. Is my money safe?
The safety of money can be considered based on the current value or future valuation. Storing your money in a safe will not make it grow and eventually, it will not have the same value in the future as today. So, investment is the best option. It is always a wise idea to read the terms and conditions (that are in fine print) carefully. As they say “Mutual fund investments are subject to market risks. Please read the offer document carefully” – the entire risk of the investment is borne by the investor in all equity-related savings instruments. However, the longer you stay invested the risks get adjusted over a period of time.
4. Should I invest and forget?
If you invest in a bank deposit or other financial institution then you may well invest the amount and forget. You would be notified when the deposit matures. However, equity investments, especially direct stock trading requires alertness and periodic updates for you to decide on your investment strategy. As for mutual funds, this is the headache of the fund manager and he takes care of switching and swapping the funds to obtain maximum returns and balance the risks. However, in any case, being well-informed is always a good thing.
3. Which is the right age to invest?
I would say as soon as you are of legal age to earn, you should start investing. Small investments that are started early over a period of time generate great returns due to the effect of compounding. Starting early also gives you a higher risk-taking ability. As you plan your investment with age, you become a less aggressive investor more worried about the risks than the returns. So start early and see your money work for you!
2. Who should I approach?
To invest in the Equity markets you will need a trading account (also called a DEMAT account). Most trading brokers offer your software that can be used for online trading. As for mutual funds, you can approach the fund houses or sometimes even retail bankers to help you with that. I would suggest getting in touch with a financial advisor of good repute so that you can bank on his advice and plan your strategy.
1. How long should I stay invested?
The longer you stay invested the better. This philosophy augurs well for both equity based as well as non-equity saving instruments. Time balances the ups and downs of the share market and gives you considerable returns over a period. In non-equity based investments, the compounding factor ensures that with time your money and the interest accrued grow considerably.