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Basics of Investing

This is the post excerpt.

Investing/Saving for the future can be complex and a tiring process but starting with a goal in mind always helps.

Goals

Before you start investing you need to understand your goals. Everyone has different financial goals and these goals keep evolving as you learn more and your priorities in life change. Broadly people invest keeping the following goals in mind:

  • ┬áRetirement
  • Fancy Vacation
  • Kid’s education and future
  • House

These goals can be accomplished with discipline in investing and making sure you invest your money in the right place.

Investing money in the right place is very important specially when you have so many investing tools and sources at disposal. People can invest in:

  • Bonds
  • Shares
  • Forex
  • Life Insurance
  • Commodities
  • Equity
  • Mutual Funds ┬áto name a few investment options.

Diversified Portfolio

Never put all your eggs in the same basket, this famous saying holds true in case of investments and how you plan for your future. Diversifying investments helps diversify risk and protects you and your investments from certain macroeconomics factors and certain unforeseen scenarios. There is always a trade off between risk and return. You have to devise your investment strategy keeping these 2 factors in mind.

Pro Tip: Folks usually divide their investment into 2-3 broad categories:

  1. Equity (Volatile but high return)
  2. Debt (Stable but less return)
  3. Fixed Deposits

Young folks have more risk appetite and their investments are more skewed towards equity side. Folks usually follow the thumb rule of (100 – Age) = Investment in Equity related schemes. This means someone who is 30 years old, he will end up investing 70% in equity related options (Stocks, MF etc.). On the other hand if someone is 50, he will be investing substantially lesser in Equity related options.

Start Investing and Keep at it

That’s easier said than done. Investing and investing with discipline requires a focussed mind and lot of discipline. I have come across folks who start investing and somewhere down the line stop paying attention to this and loose track. Thankfully most of investment platforms these days provide the option of SIP (Systematic Investment Plan) that helps people stay on track. I will write about SIP in more details in another blog post.

Understanding your Cash Flow

Different people have different liabilities and responsibilities, so understanding the cash flow is very important. Incoming (Salary/Revenue) > Outgoing (Expenses/Costs) to have a positive cash flow. Use the positive cash flow ( minus extraordinary expenses) to start investing.

Pro Tip: Please usually over-estimate how much they can save each month. Keep in mind the one time expenses and other unusual expenses (plus emergency fund) before you commit to certain investment goals.

In my next blog article I will focus on some of the investment options such as MFs, FDs, Equity etc. Please do share your feedback on this article.