Money lying idle in a bank account earns a nominal interest. Financial experts advise investors to park their wealth in schemes that offer higher returns. However, too many investment options available in the market may confuse many. One of the basic rules of investing is to start early so that time works in favour, say experts. As a beginner, the most valuable input is appropriate advice and investment guidance. People get their investments wrong just because they get their priorities and approach wrong, they add. (Also read: Five Investment Options That Guarantee Safe Returns)
Here are few key things to remember before you put your savings into a financial product:
Why should you start investing?
The only way to see money grow and work is by investing it, say experts. “Even if you save a good portion of your salary, the value of your money will get eroded with time unless you fail to invest it well,” said Navin Chandani, chief business development officer, BankBazaar. “Depending upon the risk profile and the goals one wish to achieve, he/she must choose from different available avenues of investment.”
Amar Singh, head, advisory, Angel Broking, said, “The earlier you start, the longer you compound your money. This ensures that your money works hard for you.”
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How should you start your investments?
Experts also stress that anyone at the start of his or her career should consider having a thoroughly informed financial plan. It is vital that one builds a corpus for both the purposes over time, they add.
According to Mr Chandani, the first step to any investment is understanding how much you earn, how much you spend, and how much you can save. It is important to track the expenses and spending habits. “Make a list of mandatory expenses like rent, commuting, food, etc., and draw up a budget. Try to stick to this budget as much as possible,” he said.
Anil Rego, founder and CEO, Right Horizons, echoed similar views. “Invest what you can afford. Target an amount you can save and ensure regular investment. Buy only what you believe in. Don’t invest because your friend or a family member is doing it. Understand why you want to invest,” he said.
Where should you invest?
There are several investment options available in the market for beginners. However, financial advisors say that the best way to start an investment is through a Systematic Investment Plan (SIP). An SIP allows the investor to capitalise a certain sum of money periodically in a mutual fund (MF) for a specific period.
According to Mr Chandani, one can invest in equity and debt funds via an SIP, depending on the portfolio and risk appetite. “SIP operates similar to a recurring deposit. However, unlike RDs which are debt instruments, SIP returns are linked to mutual funds, and therefore, the market performance,” he said.
“As a beginner, there is a limit to the investing capacity. That is addressed by mutual funds since you can diversify your risk even with small investments,” said Mr Singh of Angel Broking. “Mutual funds offer a wide choice of investments with a small investment. For example, you can start a SIP with as low as Rs. 500 per month and take indirect exposure to equities, indices, government bonds, corporate bonds, gold etc.”
Some experts believe investment in equities is also a good bet for investors. “The sectors which are outperforming the key benchmark index or have the tendency to outperform should have more weightage in the portfolio rather than the stocks or sectors which are sliding downwards is getting at a cheaper rate,” said Ritesh Ashar, KIFS Trade Capital.
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The portfolio must consist of stocks which have a competitive advantage over their peer groups and have the tendency to generate better value and return. “As a new investor one should invest in blue chip companies which are relatively safer and have consistent earnings and dividend record. Stocks like COLPAL, HUL, Asian Paints can be considered as good bets for long-term investment,” said Mr Ashar.
Equity can help in getting sufficient growth in the portfolio. The chances of loss in capital invested for an investment horizon of 3-5 years is extremely low, he added.
“Investors can park their funds in equity market where there can be high risk in the short term due to volatility in the market but in a long term of say 15-20 years, the investment can multiply 10 to 15 times based on the market conditions. Equity as an asset class can provide good returns of 12-15 per cent in the long term,” said Raghvendra Nath, MD at Ladderup Wealth Management.
“If the investment horizon for an investor is short term, then he may simply start with recurring or fixed deposits in a bank,” he added.
However, some analysts believe that beginners should focus more on long-term goals.
The biggest risk for beginners is investing without understanding the investment product. “Investors generally get swayed by the tall returns promised by the investment product,” said Rahul Jain, head, personal wealth advisory, Edelweiss.
“Another common mistake which investors make is investing in long term product with a short term horizon. For instance, investment in equity should be done with a long term view only as the chances of making money in equity increase with time,” he adds.
“Making short-term investments is a risky business and involves plenty of research and trade market education before opting for them,” said Rachit Chawla, founder and CEO, Finway. “On the other hand, comparatively long-term options offer more easier and safer investment plans to stick with,” he said.