INVESTING YOUR MONEY IN MUTUAL FUNDS, STOCK EXCHANGES OR BUYING SHARES AND IPO STILL REMAINS A WANT FOR A LARGER SECTION OF THE SOCIETY AS A LOT OF PEOPLE FEAR THAT THERE IS HIGH VOLATILITY OF THEIR CAPITAL AND ALSO THAT IT CAN DIMINISH THEIR PRINCIPLE IN A SECOND, BUT HERE ARE FEW STEPS TO HELP YOU EASE OUT IN INVESTING AND ALSO TO MAKE YOU UNDERSTAND THINGS WITH A BETTER VIEW:
Why to look beyond Fixed deposits?
If you would have invested in a 3 year FD of a bank, say in 2011 you could have easily earned 9.25% per annum, as a general view, this doesn’t looks bad after all your idle money is producing more of its kind, but if inflation is taken into account then things go otherwise. Over the three years ended 2013, the average annual consumer price inflation was 9.36%. That means your real return rate was at -0.11% per annum (tax not taken into consideration on interest income which would have further eaten the returns).
What is investing?
Stocks have the potential to give returns that are higher than the inflation rate. Moreover, returns from equities are not taxed if the investment is held for more than a year (excluding LTCG tax). Those who have the skills of an investor can independently build portfolios but for the rest there are, “mutual funds”.
Investing basically refers to putting your money at risk for a higher return than usual bank interests which aims to increase your earning potential.
Following points might help new investors gain confidence in the world of investing:
- Luckily in modern world we don’t need hefty sums to start our investments, rather a constant bit by bit regular investing will do.
- Possess some basic knowledge about the field you are investing in. Every investment field (bonds, shares, mutual funds, stocks etc.) have their own rules and regulations as well as terminologies related to them, you don’t need to be an expert but must possess some basic knowledge about your concerned field.
- You must set some basic goals, basically the returns you expect in a specified time period according to your needs and capital available at disposal. It includes various parameters such as safety of your capital, capital appreciation, opting for dividend or growth, exposure values etc.
- Accordingly, the next step to research upon is the risk tolerance you are planning to have. For e.g., a person may invest in large cap funds thereby choosing a path of slow but safe and slow growth, another one may be interested in getting high capital returns along with high capital at risk (where whole of the capital can even be lost).
- Another important factor to consider while being a newbie investor is making your profile hybrid and not relying on a single source, this means you shouldn’t put all your money into equities, exposure for equity should be balanced between risk appetite and returns by building a diversified portfolio. To elaborate – you may invest 50% of your capital in real estate, 20% in stocks and lastly the remaining 30% in mutual funds of mid cap or large cap/government securities.
- Next part is about deciding the type of investor you are, if you are a conservative investor and hence like to play it safe then choose your investments accordingly which involves low-risk factors such as federal bonds and money market funds. Also keep in mind about asset allocation and diversification of your investments. Remember never to put all your eggs in one basket, one bump and each one of it will crack.
- Many of the investors withdraw all their funds while experiencing early losses, bear a little courage and expect short-term fluctuations (especially for long term investors). Fear causes many investors to sell their investment too early even at much lower prices than the market prevalent prices.
- Always try to keep an eye on your investment and be on your toes for re-balancing your portfolios/investment, always remember the market value of the various securities within your portfolio changes, a must re-balancing factor for you.