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The five W’s and 1 H of investing money in 2019

First-time investors are wary of investing. It is because they have a lot of doubts in their minds regarding investing. Some of the common doubts among newbie investors include who to invest through, where I should invest, how much I should invest, etc.

Investing is the best way of maximizing money. Here are some of the ways that can help you invest.

In this article, we will try to clear the air regarding some of these common doubts through the five W’s and 1H.

Who can help me to invest?

Typically younger investors have a larger risk appetite than older investors. In India, a large number of people do not invest in the equity or the debt market. They would rather invest money in guaranteed return instruments like Fixed Deposits. As part of the citizens living in the 21st Century, we must understand that HIGHER RISK = HIGHER PROFIT. For first time investors, they must acquire the financial knowledge of the markets. But, this will take some time. The best way to invest is by choosing a financial advisor.

If you have a bank account with a Bank, you could open a Demat account with the same bank. Many Banks provide free Demat accounts if the customer has a savings account with the bank.

Choosing a financial expert must be done correctly. The following steps can help you choose the best financial advisor for you

  • Check for credentials
  • Avoid financial advisors who are trying to sell products
  • Planning and execution skills of the advisor must be justified.

What should I invest in?

Risk tolerance is the amount of risk you want to take. Risk capacity, on the other hand is the amount of risk you need to take. Risk capacity should be set at the beginning of the risk management process. It will be used during the risk analysis and drives your choice of appropriate risk responses. The problem today is that Indians risk capacity is usually not the same as risk tolerance. Most people have a lower risk tolerance than what they need as a risk capacity.

Discussing your short term and long term goals will help your financial advisor understand your risk capacity and your risk appetite. Risk appetite is the maximum amount of money the investor is willing to invest in risky instruments and non risky instruments. The difference between the risk capacity and risk appetite is called the safety margin. This will help your financial advisor choose the best investment choice as per your requirement.

In order to invest correctly, you must follow a balanced investment strategy of asset allocation. Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to your risk tolerance, goals and investment time frame. The focus is to minimize risks and at the same time maximise returns. 

Based on your risk tolerance level, we suggest the following instruments:

Low risk tolerance

  • Bonds.
  • National Pension System (NPS)
  • Gold
  • FD
  • RD

Moderate risk tolerance

  • Public Provident Funds
  • Equity Linked Shared Savings
  • Balanced funds

High risk tolerance

  • Small cap funds
  • Mid cap funds
  • Passive funds  and large cap funds

When to invest?

The best time to invest is TODAY.

The power of compounding can be seen from the example given below:

Mr. A, Mr. B, Mr. C invested Rs. 1000 on a monthly basis for 10 years, 20 years and 30 years respectively.

Mr. A Mr. B Mr. C
No of years 10 20 30
Rate of interest 10% 10% 10%
Invested Amount (Rs.) 1000 1000 1000
Total Amount at the end of maturity (Rs.) 2,593.74 6,727.50 17,449.40
Difference (Rs.) 4,133 10,722

Therefore, for Mr. A, he is able to earn Rs. 2,594 at the end of 10 years and is able to earn Rs. 6,728 at the end of 20 years. The difference between the amount of money earned by Mr. A and Mr. B earns is Rs. 4,134. Similarly Mr. C is able to earn almost three times the amount that Mr. B has earned with the same investment in 30 years.

Understanding when to invest comes with financial knowledge. New investors can invest in Liquid Funds and take help of Systematic Investment Plans (SIP) to start investing. Through the SIP, the investor invests a certain amount in their fund which is later invested into various instruments by the Fund Manager.

Where to invest?

Investors are not sure where to invest their money. The most important aspect for investing is to have a goal-oriented approach and make sure that while investing you are aware of what instruments will help you to achieve that goal.

When you become an investor, you’ll be using your money to acquire things that offer the potential for profitable returns through one or more of the following:

  • Interest and dividends from savings or dividend-paying stocks and bonds
  • Cash flow or from real estate
  • Appreciation of value from a stock portfolio, real estate, or other assets

As you learn to become an investor, you will begin to devote your limited resources to the things with the largest potential for returns. Of course, it may also mean buying stocks and bonds, or at least mutual funds or exchange-traded funds. Thanks to advances in technology, you can start to invest with as little as Rs. 100 a month.

It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from the start.

Why should I invest?

‘Kitna Deti Hain’ is one of the best examples of how a country like India is obsessed with returns. Investing must be done with a dual perspective of higher returns and financial goals.

1.    Reach financial goals

Investing can help you reach big financial goals. If your money is earning a higher rate of return than a savings account, you will be earning more money both over the long term and within a faster period. This return on your investments can be used toward major financial goals, such as buying a home, buying a car, starting your own business, or putting your children through college.

2.    Grow your money

Investing your money can allow you to grow it. Most investment vehicles, such as stocks, certificates of deposit, or bonds, offer returns on your money over the long term. This return allows you to build wealth over time.

3.    Save for retirement

As you are working, you should be saving money for retirement. Put your retirement savings into a portfolio of investments, such as stocks, bonds, mutual funds, real estate, businesses, or precious metals. Then, at retirement age, you can live off funds earned from these investments.

Based on your personal tolerance of risk, you may want to consider being riskier at a younger age with your investments. Greater risk increases your chances of generating more wealth. Becoming more conservative with your investments as you grow older can be wise, especially as you you’re your retirement age.

4.    Earn higher returns

In order to grow your money, you need to put it in a place where it can earn a high rate of return. The higher the rate of return, the more money you will earn. Investment vehicles tend to offer the opportunity to earn higher rates of return than savings accounts. Therefore, if you want the chance to earn a higher return on your money, you will need to explore investing your money.

5.    Start and expand a business

Investing is an important part of business creation and expansion. Many investors like to support entrepreneurs and contribute to the creation of new jobs and new products. They enjoy the process of creating and establishing new businesses and building them into successful entities that can provide them with a strong return on their investment.

6.    Reduce taxable income

As an investor, you may be able to reduce your taxable income by investing your income into a ELSS, PPF, NPS, Tax saving 5 year Fixed Deposit. If you generate a loss from an investment, you may be able to apply that loss against any gains from other investments, which lowers the amount of your taxable income.

How much should I invest? 

Many financial experts recommend investors to go for a 50:30:20 model for dividing their income, where they decide to divide their income into needs, wants and savings respectively.

  • Needs refer to utility (cable, cell, electricity, water, etc.) needs.
  • Wants refer to those needs which are more than the minimum needs required for survival (streaming channel subscription)
  • Savings refer to the wealth kept for future proofing

As the investor’s age increases along with an increase in income, a larger disposable income is available to him or her to save and invest. It is because the ‘needs’ are more or less the same.

Understand the difference between a trader and an investor is very important. A trader chooses to make investments and sell the shares in the short term. An investor is looking to grow his wealth; therefore he/she will be investing for the long term.

You can divide the ratio of needs: wants savings in 35%: 35%: 30% ratio.

Of the 30% savings, one must be able to decide how much of the savings must be invested on financial proofing (which has guaranteed returns) and how much of the savings must be invested on risky investments. This depends upon the short term and the long term financial goals.

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