Why? When? Where? How?
Congratulations..!! We passed the college and,
Congratulations..!! We are the earning crowd now.
These days the word we hear a lot, yes of course apart from "work" is "Investment". We have already bought most of the reasonable things, and also few of those unreasonable things we wanted. These days almost everyone has at least 25% of their salary left in the bank account at the month end. Its great if you have more then 25%, not so great if you have it much much more. Maybe then you don't understand the point of earning money. But still no issues. Its your money.
Lets comeback to the actual topic: Investment. We are particularly naive to this field. Too much influenced by the western culture. No responsibilities, lot of money, and far too many ways to spend it and have fun. In the following paragraphs i'll discus about all the new things you can do with your money, as in Investment.
Investment is not always putting your money in share market. It is a general term, its any thing where you put your money. No keeping it in safe is not an investment.
Why do we need investment?
Believe me, if you start counting there is a hell lot of reasons. I have listed few of them:
- Too much money: Yes, for people who earn far too much, thus save far too much. Lets just say, save far too much.
- Higher Studies: Yes, this is my reason, one and only reason and far too expensive one.
- Retirement Funds: But why? We just joined, retirement is too far away.
- Because time flies and retirement is always too far away till the time you have 5 years more to go.
- Because eventually you will have too many responsibilities to fulfill then to save for retirement funds.
- Because you don't realize the power of compounding.
- Emergency Fund: I know most of the companies provides Medical insurance, Life insurance, accidental insurance for their employees. Its nice because it covers most of the emergencies when we need money on shorter notice. Its great if yours is one of them. If not, go ahead, get one of those insurances ( no, I am not taking about a new company ) for yourself. Its always a good idea to set aside a fund to cover up unexpected expenses. Reasons include:
- Because the rates of interest in personal loans are too high.
- Because who knows maybe you'll have to travel abroad.
- Because you job is not as secure as you think.
- A house: Yes most of the people, including me wants to buy a house eventually.
- Vacations/ Luxuries/ Car: These are the short term investment goals, but then again requires an adequate amount of money.
- More options/ Choices: Maybe you'll decide to open a new start up.
- Short term : That is upto 3 years,
- Mid term : Upto 5 years,
- Long term : More then 5 years.
- High risk, High gain : This is pretty obvious. You'll have to choose your portfolio ( the investment products you want to put your money in ).
- Diversification : As its commonly said, never put all you eggs in one basket. Its never a good idea to risk all your money on one.
- Fixed Deposits/ Recurring Deposits/ PPFs : More or less this is similar to US treasury funds. Lowest risk, and lowest returns.
- Metals/ ETFs: This is about investment in Gold, Silver and other precious metals and commodities. There are two ways of investing in these:
- Physical form: Where you purchase them in physical form, as in gold/silver coins etc.
- ETFs: Electronically Traded Funds where the above commodities are sold in paper form. The good thing about this form is that it is liquid money, we don't have to bother about their safety and can be easily converted into liquid money.
- Real Estate : Buy land. They are not making more of it. By far this guarantee the best return but then this is not liquid money ( the money you can convert in cash in a short time ) and also getting into Real Estate requires a lot of initial investment, down payment and lots of paper work hassle.
- Mutual Funds : Investing in Mutual Funds is similar to investing in multiple equities ( shares ) or say multiple investment product at the same time + hiring an investment manager who will do research and invest your money. Is this the best way?
- Yes, if you don't want to learn finance and want to give all your saving in a person hands who says he know how to invest, and also when you want to give a part of your return as a fees.
- No, for all other reasons.
- SIP ( Systematic Investment Plan ) : This is just a way to invest in Mutual Fund, but a very popular one. It is investing a fixed amount every month on a particular date.
- Pros: Since it is regular investment over a period of time it averages out the market movement and corrections. When the market is low we can get more units of the same product because the product will cost less at low times. Better return then debt funds.
- Cons: Again the above, you cant decide when to invest, you don't exactly know where your money is invested.
- Direct Investment: This is the way to directly expose your money to the investment products without any middleman involved.
- Pros: Returns are completely yours. Research is yours. You completely know where your money is.
- Cons: The losses are also yours. I have never mentioned in the above statements that all these information will give you a control on your losses.
I wont suggest anyone to go for this method unless and until they are ready to spend some time to learn the fundamental rules of finance, but believe me, no one is as smart as you are, there are a number of ways of analyzing the stock market. Value investment ( Warren Buffet's ), Fundamental analysis, Technical Analysis are few of the popular ones.
- Out of the twelve months saving, put one month's saving into different kind of insurance plan. Its necessary.
- Always remember to reinvest the interest and dividends, this will enable you to enjoy the power of compounding in few years.
- Take account of the inflation.
- Divide your investment on monthly/ quarterly basis.