How to Invest Money: Guide for Beginners to Make Money for Future
Investing your money is as important as earning money. If inflation grows at a rate faster than your money, then over a period of time, your money would have effectively reduced in value.
However, the big question is how to start your investment journey. As a budding investor, you should know that you can amass wealth only when you invest smartly and remain cognizant of prevailing market conditions. Let us discuss how to invest your money wisely to earn optimal returns.
Why Should You Invest?
Investment is one of the most lucrative ways to make money and build wealth if done right. Investing in ventures and venues that are guaranteed to give you returns is an ideal scenario to consider. Investing is a process that facilitates value addition for the economy, which is driven by your funds. Moreover, another crucial aspect of why you should invest is because of inflation, wherein your money will be worth less in the future than it is today if left idle in a savings account.
How to Invest Money Wisely?
The answer to the question of how to invest money wisely depends on several factors. Here are some basic steps that can help ensure that you invest your money wisely.
Goal Based Investment
Planning for how to invest money starts with analyzing your financial goals and how much time you want to achieve those goals. For instance, if your goal is to own a house in the next ten years, you should ideally choose to invest in long-term mutual funds. On the other hand, if you just want to make enough money to be able to go on an international vacation, then investing in short-term liquid funds will be ideal.
Determine your Risk Tolerance
Before you start investing, it is crucial that you know that the investment options are volatile and your returns are exposed to market fluctuations. This is especially true if you choose to invest in equity and equity-linked instruments. You are on the safer side if you invest in instruments that remain largely unaffected by market volatility. It is also important to know that the amount of risk you are willing to take directly impacts the returns from the investment. This is because high risk generally creates a high return potential. However, this also means that you stand a high risk of losing the invested capital if you park your money in a risky investment.
Therefore, before choosing an investment instrument, it is crucial that you have clarity on the level of risk that you are willing to take.
Choose Investment Instruments
Before creating a portfolio of investments, you should have an understanding of popular investment instruments and the associated risks. Another factor you must consider while choosing an investment instrument is the expected returns and the maturity period of the instrument. For example:
- If you are risk averse and just want to park your money somewhere safe and are happy earning interest, then bank savings accounts or fixed deposits can be the ideal options. Your capital remains safe from market fluctuations, and you earn interest on your investment. Some other safe investment options can be real estate or gold. However, the returns would be considerably low.
- If you are willing to take the moderate risk and expect returns higher than what you would get from a bank fixed deposit, you can choose to invest in moderate-risk mutual funds or corporate bonds.
- If you are willing to take a high risk and get high returns on your capital, then investing in equity can be the ideal option. Equity investments are highly volatile, and you should ideally understand the equity markets and risks involved before making an investment. However, if done right, you can earn significant returns through this investment route.
Start your First Investment
There are many financial services intermediaries in India that offer their platform and services to trade in investment instruments in exchange for brokerage. You can open an investment/Demat account by choosing the intermediary that best suits your requirements. Most intermediaries offer seamless fund transfers by linking your investment account with your bank account. This linkage helps you to deposit funds into your investment account for making investments and to withdraw the funds into your bank account once you have liquidated an investment.
Where Should you Invest your Money?
The answer to where you should invest your money entirely depends on your risk appetite, preferred choice of investments, mental fortitude, and financial lifestyle. If you are a person who prefers short-term high gains, which goes without saying, comes with higher risk, your preferred pool of investments would come under a particular basket.
On the contrary, if you are a person who prefers wealth building through long-term investment instruments, you would do well with a different set of instruments. Let’s take a look at both financial lifestyles to better point out which pool of instruments would help you reach your goals:
Short-Term Investment Instruments:
- Stock Trading
- Money Market Funds
- Short-Term Bonds
- Certificate of Deposits
Long-Term Investment Instruments:
- Real Estate
- Mutual Funds
- Retirement Accounts
- Sovereign Gold Bonds
- Fixed Deposits
Thumb Rules of Investing
Here are a few thumb rules for investing:
- Focus on the long-term: Many people start investing to make quick profits. However, if your investment horizon is short, your investments are exposed to a greater risk of market volatility. Investing in the long term is a more prudent investment option. Long-term investments can help you to mitigate market risks if you have chosen to invest in high-risk instruments. A long-term investment also allows you to earn more interest, and hence you can build a larger corpus. Some investments allow you to enjoy the benefit of compounding interest when you stay invested for a longer tenure.
- Be patient: You must invest time to understand the basics of investment and the market dynamics properly. Read and research as much as possible on everything related to your investment instrument. More knowledge will help you be more patient through your investment tenure.
- Diversify your investment: You should never park your entire corpus in a single investment instrument. Diversify your investments to ensure having a mixed portfolio. This is a great risk-mitigation strategy as the lower-risk investment instruments may balance out the high risks involved with the risky investments. In this way, even if one investment strategy doesn’t work well, you’ll have other options to fall back on.
What are the Types of Investment in India?
There are innumerable investment types which are open to retail investors in the Indian sub-continent. Here are all the types of Investment available in India:
- Equity Investments
- Debt Investments
- Real Estate
- Precious Metals
- Fixed Income Instruments
- Government-Sponsored Schemes
- Retirement and Pension Plans
- Commodity Market Investments
- Alternative Investments
- Insurance Investments
- Cash Equivalents
Best Options for Investment in India
The best options for investment would be determined by your investment goal. You can check the following investment types from long-term and short-term perspectives.
It means investing directly in the stock market. You will need to open a Demat as well as a trading account with a broker. Through this, you can directly buy shares of a company from a recognised stock exchange in India. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are two recognised stock exchanges in India. Equities are risky, but they give higher returns in the long run. You must be patient while investing in the equity market, as it might not perform well in the short run.
Investing in mutual funds is one of the best options to achieve long-term financial objectives like retirement or buying a home. You can find the best-performing mutual fund either online or through a financial consultant. Investing through a consultant is safer if you have less knowledge about how mutual funds work.
They are debt securities issued by public and private sector corporations. You, as an investor, will buy bonds and lend money to these organizations and get interested in the exchange for the money lent. They are a reliable source of regular fixed income for investors with a moderate-risk profile.
Growing urbanization, focus on consumerism, and easy availability of home financing options led to the growth of the real estate sector. The enactment of the Real Estate (Regulation and Development) Act, 2016, has improved the safety aspects of investments in this sector. This is a safer investment option also because property prices usually appreciate with the economic development of a region or a country. In addition to the value of your property appreciating over a period of time, buying a property allows you the option of earning a fixed rental income.
Fixed Deposits (FDs)
It is a low-risk investment instrument provided by banks and other financial organizations, which gives a higher interest rate than regular savings accounts. Although they offer guaranteed returns, fixed deposit interest rates are generally lower than the rate of inflation, thereby exposing your investments to the risk of negative returns.
Gold Bonds (SGBs)
Want to invest in gold but not hold it? SGBs are a great choice. The Indian government gives these bonds. They are linked to gold’s current price. People also get some extra interest. You don’t need to worry about keeping the gold safe, and you can save on taxes, too.
Insurance Investment (ULIPs)
ULIPs are two-in-one. They give you insurance and let you invest money. Some of your money goes into life insurance, and some into places like stocks or bonds. They can also help save on taxes.
Post Office Schemes
These are common investment options in India. The government promises you get your money back through a constant stream of income. Popular ones are POMIS, SCSS, and KVP. They are safe and give decent returns.
Public Fund (PPF)
PPF is a favourite savings option in India. The government backs it, so it’s safe. You get tax savings with it. Plus, the interest earned is decent. You must keep the money in for 15 years before taking it out.
How To Choose The Best Investment Plan?
1. Define Your Investment Objectives
It’s essential to be clear about your purpose for investing. Are you aiming for financial security during your retirement? Perhaps you’re saving for your child’s higher education or wedding. Or maybe, you wish to maintain a specific lifestyle post-retirement.
Recognizing these goals will allow you to align your investment strategy with instruments like Mutual Funds, PPF, Fixed Deposits, or ULIPs. Remember, while short-term returns might seem lucrative, the wealth magic often lies in the patience of long-term investments.
2. Gauge Your Risk Appetite
Every investor’s risk threshold varies. If you’re eyeing long-term gains, a higher-risk profile might suit you, as it offers lucrative returns over time. However, for those with short-term goals, a conservative approach with lower market risk is advisable. Whether you lean towards high-growth funds or prefer balanced options, it’s crucial to invest in sync with your comfort level.
3. Consider Liquidity Needs
Imagine investing a significant portion of your savings, only to realize you need funds for an immediate need, such as purchasing a car or your child’s education fees. Opt for plans that offer a balance—long-term growth combined with options for partial withdrawals or short lock-in periods.
4. Prioritize Family Security
Life is unpredictable. Ensuring your family’s financial security in the unfortunate event of your passing is paramount. Consider investments like term insurance that offer monthly income benefits, securing your family’s future and maintaining their standard of living.
5. Seek Brand Reliability and Consistency
Place your trust in companies with proven track records. A brand’s reputation, built over years of consistent performance and positive word-of-mouth, can be a reliable indicator of its potential. Scrutinize their history, ensuring they consistently deliver on promises and show growth.
How Do Risk factors affect your Investment choices?
Risk factors are one of the most crucial aspects that affect your investment choices. The fear of losing your money to the market places obstacles that are not easy to cross over. However, that being said, let’s take a look at how they affect one’s investment choices:
- Research and Adjustments: Grasping the risks makes it vital to research well before putting money into an investment. It’s key to check on and tweak the portfolio due to shifting risks regularly.
- Getting Guidance: Knowing how deep these risks can be, many folks turn to financial experts. They want to make smart decisions with their money.
- Mixing Investments: To lessen risks, folks often spread their money across various types of investments and places. This way, if one thing doesn’t do well, it doesn’t hurt everything they’ve invested.
- Thinking About Time: How long someone plans to invest and how much risk they’re okay with can shape their choices. For example, if they think long-term, they might be okay with ups and downs in the short run.
To start your journey as an investor, you only need good analytical judgment, attention to detail, and an understanding of your financial situation. When it comes to investment, do not focus on finding the single strategy that has worked for people in the past. This is because people have unique financial situations, and what works for others does not guarantee success for you. So, the effort should be on how to achieve the right mix of high-risk, low-risk, short-term and long-term investments to help you become financially secure.
Frequently Asked Questions
What are low-risk investments?
Fixed Deposits, Recurring Deposits, National Pension Schemes, treasury notes, provident fund and fixed annuities are a few low-risk investments.
How is asset allocation different from diversification?
Asset allocations refer to the process of dividing your money into various assets like stocks and bonds. Diversification is like spreading your investment into multiple assets to minimize the risk. It is a process of asset allocation, so both have similarities.
What are some great investment options for capital appreciation?
Direct equity, mutual funds, and national pension schemes are a few investment options for capital appreciation.
What are the various kinds of bonds available in India?
Government Securities Bonds, Corporate bonds, Convertible bonds, Zero-Coupon bonds, RBI Bonds, Sovereign Gold Bonds, etc., are the popular types of bonds available in India.
What are the different kinds of gold investment avenues?
There are various types of gold investment avenues, such as Physical Gold, Gold Exchange Traded Funds, Gold Mutual Funds, and Sovereign Gold Bonds, where you can invest money and enjoy returns.
Where to invest money in India for maximum returns?
Consider equity mutual funds or direct stocks for potentially high returns, but remember they come with higher risks.
Where to invest money in India for monthly income?
Opt for fixed deposits, monthly income schemes, or rental real estate properties to generate steady monthly income.
How to invest money in stocks?
Open a Demat and trading account with a brokerage, research companies, and buy shares via stock exchanges like NSE or BSE.
What are the investment options available with low risk?
Public Provident Fund (PPF), fixed deposits, and government bonds are among the safer investment choices in India.