How can you start investing? – This is a question which several wannabe investors have. These may often be wannabe serious investors, or just someone who heard of investing and wants to get started (and different types of people in between!). It might just be indicative of the general inertia while investing.
So – how does one start?
Here are some tips to get started!
(Disclaimer – There can be many right ways to start investing. Depending upon the context, several of them can be correct. While I believe, that the following points can be good tarting point, use your own thinking before starting to invest.)
You can follow these 4 steps (in this sequence) while investing.
1- Get the basics covered
Before investing, it is important to the basics covered. What are these basics which you should get covered?
Here are some basics you need to keep in mind!
- Emergency fund,
- Term life insurance
- Health insurance.
- Getting rid of most of your debt (if something gives tax benefit -e.g. home loan)
- Start saving, in case you aren’t already. Have expenses < income.
A caveat though – While talking of life insurance, lot of salespeople may pitch some combination of insurance and investment – stay away from them (Related – Why you should not mix insurance and investment)
(Side note – Getting basics covered — this is often used by Ashal Jauhari (admin) from the popular Facebook group – Asan Ideas for Wealth. I’ll suggest you to join this group as it has lot of good discussions around investing)
2 – Understand your major goals & timelines
While it is not uncommon, to start investing just like that – without goal in mind, it is good to have a goal. This will have an implication on your risk profile – and hence nature of your investments.
What can some of these goals be?
Some possible goals are own marriage, kids’ marriage, kid’s education, own higher education, vacations, buying a house, buying a car etc. Different people can have different timelines & money requirement for these.
While you can do your investments yourself, it does require a fair bit of reading and understanding of different investment products. Alternatively, you can take help for financial planner if needed. A fee based financial planner ideally, as they are likely to charge a flat fee rather commission while selling products (these products may not be in your best interests).
3- Understand different investment options
There are usually plethora of options while investing. Some of the popular ones are:
- Debt instruments – bank fixed deposits, different types of debts funds, taving options like PPF, NSC, VPF etc.
- Equity in investmnets – Stocks f companies or equity oriented mutual funds
- Real estate
- Gold/ silver
How do you decide where to invest among these?
There is no fixed rules, but broadly most of the advisors will probably suggest the following:
- For goals that are not too far away (say, 4-5 years), invest in debt instruments – they are likely to protect your capital. (giver returns in line with, or marginally more than inflation – most of the times, though not necessarily true.
- For long term goals – invest in equities, since they have likelihood of giving good returns in long run (historical trends have shown so). However, the returns are not assured and there may be some risk involved.
- Real estate – This might suck in lot of liquidity & may not give good returns, if recent trends are anything to go by. Commitment required (in terms of money you invest over a period of time) may be too high. However, if you are investing in home as a primary residence, considerations can be different.
- Gold/ silver – While many households love it, their returns are not necessarily good, especially in recent past. However, it is often used as hedge against high inflation.
A word of caution about equities – Invest in direct equities only if you can keep a track and do some basic analysis yourself. Else, it may be better to invest via mutual funds, preferably via SIP (systematic Investment Plan – which can reduce the impact of price volatility)
Choose the investment mix which best suits your goals. At the same time, be aware that your investments should give you certain peace of mind. So if volatility unnerves you, then rethink your exposure to volatile asset classes.
4. Open your investing accounts & start investing.
Once you have decided on the investments. it’s time to get started.
The first step towards this is opening an account – demat account, house sale agreement, bank account for deposit etc. There may be some paperwork needed as a part of the process.
Sounds trivial, but this is one place where inertia is likely to be there!
Next – Start investing. However small that may be. But do start!