A new budget can be an opportunity to start improving your financial decisions. You may have just started working or established your business and there may be some cash inflow, which you wish to invest but don’t know how to go about it. Here are some simple guidelines to get you started.
1. List your goals clearly: The first step for any new investor is to understand the financial objectives she wants to realise. It could be buying a car or a motorcycle, purchasing a life insurance policy, taking a house on rent, going on a vacation, or anything else. Once your goals are in place, you can decide which investments will be best to attain them. You can dream or wish as much as you want, but there has to be an action plan to fulfil them. That’s especially important when it comes to financial goals, since these will require regular investments of money and effort over a long period of time.
2. Take informed decisions: Knowledge is power. Before you decide to invest in any financial tool, be it fixed deposits, mutual funds, or direct equity, make sure you have all the necessary information about the vehicle. Look at the product’s performance, tax liability, maturity period, withdrawal rules, and other such factors. Investors cannot control losses occurred on account of market fluctuations, but they can certainly avoid monetary disasters by making prudent choices.
3. Start early: It’s not just the early bird that gets the worm; an ‘early’ investor also gets a bigger corpus at the end of investing period, compared with someone who started late. This is mainly due to compounding. According to a study by a fund house, if investor (A) begins to put in Rs.1,000 monthly in a balanced fund (50:50 equity-debt ratio) at the age of 25 years and another investor (B) starts to do the same at an age 30, A will build a corpus of Rs.80 lakh by the time she hits 60, and which will be twice the corpus of the Rs.40 lakh that B would have accumulated. A gap of just five years can result in a doubling of the investment corpus. That’s why, especially for a beginner, investing in systematic investment plans (SIPs) should become a habit. SIPs run over a period of time (decided by you) and help you avail of compounding.
4. Have a diversified investment portfolio: If you invest all your hard-earned money in equity and the market collapses, you will lose everything. The same can happen with any other asset class, be it debt, real estate or gold, or any other. That’s why financial advisers always emphasise on the importance of having a diversified portfolio. Put your money across various asset classes to maintain constancy in returns and eliminate unexpected risks at the same time. A well-balanced portfolio also allows an investor to carry out goal-based spending effectively. Diversification does not mean that you have to invest some money in every asset class. The aim is to minimise risk by diversification and making a more stable portfolio.
5. Seek an expert’s assistance: Investment decisions taken due to ignorance can turn out to be wrong and lead to losses. Seeking professional advice can help you choose the right products, build a suitable roadmap, and even help you trim some goals if needed. This can be especially true for beginners. For instance, there may not be a need to buy a life insurance policy if you do not have financial dependants (even though your colleagues may be buying). Instead your immediate need might be a health insurance plan.
A financial adviser can also guide you in managing your finances, whether it’s adjusting your debts such as loans to minimise repayments, or saving to buy a house. The goals could even be saving for a holiday, planning for retirement (no, it’s not too early), maximising pension after retirement or ensuring your family is protected if something happens to you. The right advice will help you achieve your goals faster and more effectively.
6. Be patient, money doesn’t grow overnight: Many people who have started investing only recently want immediate earnings. This is an incorrect approach. Returns multiply over a period of time. Don’t just think about how much money you can make in the present year; plan out how you can make money in the next 10, 15 or 20 years, i.e., consider long-term options. To be able to do this, know the difference between saving and investing.
Savings are typically for smaller financial objectives to be met within short periods of time, say, 1-3 years. If you are planning to buy, say, a mobile phone or to go on a small vacation in the near future, saving might be a good option. Investing is typically a long-term plan for bigger financial goals.
Once you start investing, you might feel overwhelmed in the first few months and could even make some minor mistakes. But eventually, you will understand the products and what they do and what your needs are. The important thing is to start, and start early. - livemint
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