Basics of investing
Investing is an art. It is all about taking cautious risk to generate steady rewards. The basic principle of investment is that the asset selected should match the risk bearing capability of the investor. The investment should be for longer period to generate the required quantum.
Investment is different from saving
Investment and saving almost mean the same, but are different from each other. Saving means keeping aside a portion of earning to meet unforeseen or definite events in short term. Hospitalization is an example for unseen event while payment of school fee is definite event. Aim of saving is having a sum in custody to meet any eventuality.
The purpose of investment is creating a corpus over a period of time by acquiring an asset that gives better return than inflation.. Investment is for medium to long period. Marriage of daughter, acquiring a house or vehicle etc are examples for goals in medium to long term. Investing is the art of taking calculated risks and managing the risk to generate good return. In investment too, taking unnecessary risks is a bad strategy. Savings habit is the foundation of investment as the investor should have the desire to keep certain portion of income for future requirements.
Income from investment
The purpose of any investment is to generate a steady flow of income from the investments. The income that is generated from the investment depends on the nature of investment. Interest, dividend, rent and capital appreciation are different types of income generated depending on the type of investment instrument.
Risk decides return in an investment
“Higher the risk, better the return’, is a saying associated with investment. But taking unreasonable risk for return comes under speculation. It is beyond the purview of investment. Uncertainty is an integral part of investment. But when the uncertainty exceeds the tolerable limits, it becomes gambling.
Investment aims inflation beating return
Investments are made to meet life goals. The goal vary from investor to investor. Marriage of daughter, higher studies of son, construction of house, foreign trip, r retirement etc are some of the common goals. The aim of all investments is to meet the money value of life goals. To have the required amount at the time of requirement, the investment should be capable of generating income at a rate better than inflation. The excess rate over inflation decides the real strength of the asset. The investment will be able to generate sufficient corpus only if the return on investment beats inflation rate.
Different investment options
The common investment options available are Shares, Mutual Funds, Term deposits with banks, NSC and small savings with post offices, PPF, NPS, Gold, Bonds and Government securities.
The rules that govern any investment are a. starting early, b. investing regularly and c. investing for long time. When the investment is for a long term, the investor gets the benefit of compounding. The compounding effect works only if the investment is for long term. In such cases, an investor is rewarded in two ways a. income on original investment and b. income on reinvested income. Compounding effect is the most beautiful aspect of any investment.
Now is the appropriate time to invest
The root cause for lack of investment habit in society is procrastination. People prefer to spend major portion of income and procrastinate investment waiting for opportune time. Such a good time never arrives. Investment is made for a longer period and to initiate such a good habit, the most appropriate time is now. Any investment needs time to grow and the sooner you start, the better.
No amount is small for investment
No amount is small for investment. In fact, investment in mutual fund can be started with a small amount of Rs. 500. The final corpus is a combination of various parameters like, period of investment, frequency, risk bearing capability of investor etc. Rather than the amount of initial investment, cultivating the habit of regular investment is more crucial.
Stocks and mutual funds are two best investment options for long term
Investment in stock or equity means investment in the future of the country. All countries form strategies to grow better. Manufacturing, service sector and agriculture are three priority areas for any government. As it is impractical for the government to meet all invest requirement, they encourage private investors by creating favorable investment climate. Private investors raise capital by issuing equities.
Volatility is the mark of equity investment. The market volatility get nullified by the positive economic trend of the country. Consistent performance of the company multiplies the initial investment manifold through capital appreciation and dividends. These are the advantages of long term investment in the shares of a performing company.
But patience and due diligence are required for investment in good companies. For general public, it is difficult to have the required knowledge in these fields. Mutual funds perform these tasks for public by charging nominal commission. They do the analysis and research of companies and carry out investments. Mutual fund thus become the best vehicle for investment in shares.
