People working hard to earn money are always on the lookout for investment tips for better insight on how, where, when, and how much to invest. This can be a hassle for beginners as there are many ways of investing right now, many of which may seem extremely confusing, resulting in frustration and either ill-informed decisions, or keeping their money in a savings account.
To keep things simple and concise, we’ve created a guide to investing for beginners, and these investment tips can help you figure out which investment scheme best suits your aims and needs.
What is investing?
Investing is a smart way to make your money earn for you. Saving a portion of one’s income to put it in the financial schemes run by the government, banks or financial institutions, to redeem a good amount of interest on these savings is called investing in simple terms.
Types of investments
You can invest your money in various types of investment schemes available in the market depending on your risk appetite, amount of savings and time period you wish to invest for. Here are some of the types of investment schemes available in the market.
A deposit is a low-risk investment in which the investor receives interest on funds deposited with banks or financial institutions. These deposits are of two types, fixed and recurring. Different banks and post offices have different rates of interest which they offer their customers.
You can simply contact your nearest bank branch to open a fixed or recurring deposit in their bank. The rate of interest on these deposits is more than what you get in a savings account. Also, you can always choose to have a sweep-in FD in case you don’t want to block your money.
A fixed deposit’s sweep-in feature enables investors to transfer extra money from their bank accounts to their FD accounts, providing them with the chance to earn more profits with a flexible lock-in facility.
Mutual funds are well-managed investment schemes by asset management companies that pool a group of investors’ funds and invest them in stocks, bonds and other securities. These schemes give higher returns than deposits but involve more risk as compared to deposits. The major benefit of investing in mutual fund schemes is that it provides you with the facility to invest in a diverse range of professionally managed funds by experienced fund managers.
Mutual funds allot you units on NAV (net asset value) of a particular scheme in exchange for money. These units can be purchased in a lump sum or via SIP (Systematic Investment Plan). You can check NAV and all scheme-related data on online portals including Money Control, Value Search, INDmoney and Groww.
A high-risk investment type with a higher rate of returns, stocks are a great way of putting your funds in shares of companies and availing your share in their profit. Investment in stocks requires immense research about how well a stock will perform in future and what type of return it will generate.
As a beginner who doesn’t know much about investing in shares and their technicalities, one can always opt for a subscription for tips from various agencies in the market which have a dedicated CRM team to guide you. However, you can always track the value of stock and maintain your portfolio on online portals.
Bonds are moderate-risk investments which involve lending money to either a business or government entity. Business entities issue corporate bonds whereas government entities issue municipal bonds. The rate of interest on bonds is generally higher than on FDs and lower than on mutual funds and stocks. But one needs to remember that these bonds have a lock-in period of over one year, which can go up to 10 years or more depending upon the type of bond you are investing in.
For beginners, start by buying and investing in SGB (Sovereign Gold Bond) instead of physical gold which involves making charges. Buying an SGB has two major benefits — it gives a guaranteed interest of 2.5 percent per annum on the amount invested, and tax on capital appreciation is exempted.
Public Provident Fund (PPF)
PPF is one of the safest investment scheme. The rate of interest on PPF is higher than FD. A PPF account can be opened in any bank or government financial institution such as a post office. Interest rates on PPFs are decided by the government. Amount invested in a PPF account and the interest earned on that amount, both can be exempted from tax.
As a beginner, you can start investing in PPF and later increase the amount of investment if you wish to invest more.
Reasons to invest
- Investing money helps one build wealth that supports their survival in uncertain times.
- It gives one confidence to fearlessly achieve all their dreams that require a monetary exchange.
- It helps one grow savings from the interest received on the principal amount invested.
- It works as a secondary source of income which helps attain financial stability and maintain a proper standard of living.
- It helps build a corpus fund to sustain savings after retirement.
- It also helps one save tax depending on the scheme one has invested in.
The right time to start investing
Just like it’s never too early or too late to learn anything in life, it’s never too late or too early to invest your money. The real drill lies in understanding ‘how to invest’ and ‘which scheme to invest in’. Start investing your money anytime you feel you’re capable of saving a portion of your income that is required for a longer period.
The amount saved doesn’t even have to be massive. All you need to do is plan and start investing as soon as possible. There are schemes in the market which allow you to systematically invest a small amount of your savings to make it big.
Why start investing early?
While it’s never too late to start, it’s always good to start investing early, even for beginners.
- When you start investing at an early age, it helps build a balanced relationship with money, where you know when to spend and when to save.
- It helps understand how compounding can help grow your money in many folds.
- It allows you to take more risk and earn better returns on your savings, and if the decision goes wrong it doesn’t affect your long-term financial goals.
- It gives financial freedom to maintain a good standard of living and provides for the well-being of families.
Investment risks to know before an investment
While planning to invest in a scheme one must consider analysing risks associated with that investment. Investment risk is one of the most important factors which one must consider and have detailed knowledge about before investing.
The various types of risks include market risks — the risk that arises from movements in stock prices, interest rates, exchange rates and commodity prices; liquidity risks — the chance of suffering losses as a result of failing to make payments on time or failing to do so at a cost that is manageable; inflation risks — based on how the prices of goods and services increase more than expected.
Always research well or seek help from a financial expert to know about the risks involved in investing before making the investment. As an investor, it is your right to know everything about where your money is going and what the organisation will do with your money.
Terms to know before investing
Here is a list of terms to know and improve your financial vocabulary before you start investing:
NAV: Net asset value or the net value of an investment company
ROI: Rate of interest
Principle Amount: Amount which you have invested
Portfolio: A detailed analysis of all the holdings of a company or an individual
Dividend: A regular sum of money paid by a company to its shareholders
EBITA: Earnings before interest, taxes and amortisation
Market Capitalisation: Value of all the stocks of a company. There are three types of market caps such as large-cap, mid-cap and small-cap.
Equity: Ownership of assets that may include debts or other liabilities related to them (with respect to investment)
XIRR: Extended Internal Rate of Return, which is a method used to calculate returns on investments
EAT: Earning after tax, used to analyse a company’s net profitability
Investing for beginners: best plans to start with
As a beginner, it is always tough to figure out how to invest in different schemes in the market and which scheme will suit your financial needs. However, it gets easier with time and some self-analyses. Here are some investment tips to use before investing.
- To diversify your portfolio, always have a mix of low-risk and high-risk investment options, and consider starting with investing in fixed deposits, recurring deposits, bonds and PPFs.
- Further, start with investing in large-cap mutual funds and then move on to mid-cap and small-cap mutual funds.
- Investing in stock is a very high investment, so consider your risk appetite before investing. Also, research that stock to know if it’s too risky or involves moderate risk.
- Check FD rates in small finance banks first as they provide a higher return on investment and have the facility of opening only FD accounts.
- Try investing money in stocks and mutual funds for more than five years to earn a better return on investments.
How much money should a beginner invest?
The amount of money you should invest totally depends on the income you generate, how much you are able to save and what kind of risk appetite you have. So, if you want to figure out how much investment you should make as a beginner, consider categorising your preferences on the basis of the above-listed questions and then decide which scheme would suit your purpose. Also, before categorising preferences remember a few important things as mentioned below.
- Set achievable goals and then plan to invest in a scheme.
- Consider your risk tolerance and financial stability before investing in a scheme which involves high risk.
- Don’t get overconfident too early when you start to invest.
- Research well about mutual funds schemes which are recently launched.
- Always try to diversify your portfolio in terms of risk associated with an investment.
- Consider exit load, brokerage charges, bank charges and before-maturity redemption charges.
- If you are still unable to decide, consider taking help from your financial advisor.
(Main image: Courtesy Precondo CA/Unsplash; Featured image: Courtesy cottonbro studio/Pexels)
Frequently Asked Questions (FAQs)
Answer: Investing in stocks requires detailed research of the market which takes time. So, always take help from a financial advisor before planning to invest in stocks.
Answer: Crypto is a high risk investment so as a beginner, one should be cautious while investing in crypto. Do a detailed research on performance and then invest in it.
Answer: Investing in stocks, crypto and mutual funds gives higher returns than FD, PPF and bonds.
Answer: Best investment options for students is to invest in PPF, bonds, mutual funds and large cap stocks.
Answer: You can start investing with an amount as small as Rs 100.