Let’s start investing !

Now that you have understood why investing is important, here’s how you can actually go about doing it in 3 simple steps:

Step 1: Be sure that the investments that you plan to make suit you:

Investments and risks: Some investments carry more risk than others. For instance, buying and selling stocks on a daily basis is considered risky while keeping your money in a bank fixed deposit or better still, government bonds is considered safe. There are other investments such as gold and real estate which fall somewhere in between.

People and risk: At the same time, there are some people who thrive on taking risks while others would prefer to avoid them. The level of risk which you are comfortable with may be determined by your circumstances. It is likely that people with greater accumulated wealth, fewer dependants, etc. are more open to taking risk. But that’s not necessarily true either. Some people are just natural risk takers while others naturally fear risk and still others are somewhere in between.

People, investments and risk: Ideally every investor should have some high risk and some low risk investments. This is because high risk investments typically offer a chance to gain higher returns while lower risk instruments offer moderate scope for returns but are more secure. Having a mix of both ensures that your money grows and has some stability as well. However, there is no ‘ideal’ mix of both that can be recommended for everyone. Your investment mix, also called your asset allocation in technical terms, should depend on how comfortable you are with risk or in technical terms, your risk taking ability.

Match-making: Irrespective of how much risk you are comfortable with, make sure that you have a mix of investments that you are comfortable with – no sleepless nights, fearing that you have taken on excessive risks and no restless feelings that your money is all too safe but not able to give you a chance to make good money. But having said that, there are some benchmark asset allocations that correspond to people with different risk taking abilities:

Step 2: Pick suitable investments within each asset class

There are two mainstream asset classes or types of investments – equity and debt.

Investing in equity - Investing in equity actually means that you have invested in a business which is being managed on a day-to-day basis by someone else. Accordingly, the returns that you can expect to receive will depend on how successful the company you have invested in is. If you choose good companies, you could benefit from profits and from an increase in your investment as the company grows in value. If, unfortunately, you choose a bad company, you could lose everything upto the amount that you have invested. So, how do you pick those winners? By doing your homework diligently – study potential companies and industries and how the economy is progressing. Alternatively, you could just invest in equity through a mutual fund. This way you pass on the chore of picking stocks to a professional fund manager who has a team of research analysts to support his decisions.

Investing in debt - Debt as an asset class includes investments which give you a fixed return. It is called debt because you are effectively lending your money to the government (in the case of government bonds) or a bank (in the case of bank deposits) or some other institution. As in the case of equity, you could invest directly in the debt instrument or you could invest in debt through a mutual fund.

1. Bank/company deposits, post office schemes and tax free bonds – When you investing directly in bank or company fixed deposits or in a post office savings scheme or in government or semi-government tax savings bonds, you are aware of the tenure of your investment (i.e., for how long you will be investing) and the rate of interest that you can expect, right from the time you make the investment.

2. Debt mutual funds – When you invest through a mutual fund, while you are still investing in secure, fixed income investments, there is a fund manager who tries to improve the returns on your investment. He does this by monitoring the markets for fixed income investments and making investment decisions in keeping with a stated objective. Another advantage of investing in debt through a mutual fund is that you gain access to some debt instruments

which you may not have been able to as an individual as the minimum investment limits are rather high. Being a fund that pools together the investments of many large and small investors, a mutual fund manages a large corpus of money and can invest in such instruments on your behalf.

Step 3: Make your investments!

This is perhaps the easiest step once you have short listed the investments that you plan to make. All it requires you to do is get your documents in place (all investments these days require some proof of identity and residence amongst other documents), obtain the necessary application forms, fill them in and submit them to your broker or agent or directly to the source of investment.

End note

Remember, investing is not rocket science but it does require you to dedicate a little time and effort if you hope to make it a success. To further facilitate your investment exercise, you could use the services of an investment advisor or wealth manager and benefit from their experience.