If you’ve just embarked on your professional journey to not only experience what your career may have in store for you, but also to invest some money to build a safe financial future, you’re headed on the right path. Investments are an integral part of a person’s financial growth. Made in the right time and the right way, your investments will not only provide massive financial growth opportunities, but also secure important financial aspects for your future.
Before we dwell deeper, let’s first understand: What is Investing?
“Investing the process of laying out money now to receive more money in the future.”
— Warren Buffett
Investment, formally put, is the allocation of your money in different assets for future gains. The act motivates an investor to think critically and act smarter when moving funds. It requires the investor to be vigilant towards market trends and act accordingly – it is only then a person can gain as an investor.
The simple answer to this question is to gain more money, but, there’s more to it of course. The need and reason to invest may differ from person to person and for different age groups. Stated below are few reasons:
- To save – Investment is an effective tool to save money. For example: A person may invest money with an aim to save money for after-retirement life, or to simply fend for oneself.
- To increase wealth – This is most often the primary motivation behind investment for most people. Over a long period of time, profits earned from investments can substantially increase wealth and increase your net worth.
- To achieve economic goals – People often make investments to meet their financial goals, whether it is a long term or a short-term goal. Investing money in new businesses also helps entrepreneurs to expand their business.
- To save tax – People invest some part of their income as a tool to save tax, like paying for medical insurance in pre-tax money or investing in tax saving mutual funds.
Where to Invest?
Okay, so before you make an investment you should be clear about two things:
- What is your goal for investing?
- What is your risk bearing capacity?
Investors can invest their money in several product and instruments, called Investment Vehicles. Investors are always advised not to commit their money in single investment vehicle, but instead diversify their investment. This helps them to minimize the chances of risk.
All investment vehicles have their pros and cons, some facilitate long term growth at a slow pace, some are volatile in nature and involve more risk but allow faster and higher returns. An investor should always go for investment vehicle which is compatible with the set goals and current financial position. Some popular investment vehicles are described below:
Stocks or equities represent an investor’s share of ownership in a publicly owned company. Stock entitles an investor’s claim over company assets. The ownership is limited to the quantity of shares the investor holds.
Stocks are means for companies to acquire capital for many reasons. Whenever the company earns profit, the profit is divided among the shareholders. If the stock’s price increases more than the price you bought for in the market, you can sell those stocks to earn profit.
Bonds are a form of fixed income. They act as a money borrowing tool for the issuing entity – which could be a company or even a national government. These entities issue bonds to the public for borrowing money, and if investors buy those bonds, they become a lender to that company. Investors are paid a steady amount of interest over time at a certain interest rate, which makes bonds a stable source of income.
Mutual funds are an attractive form of saving since they seem to combine some of the earning potentials of sticks with some of the safety aspects of bonds – both to a limited, but certain degree. In a mutual funds, funds are pooled from investors and then invested into a diversified portfolio of investment vehicles ranging from equities, money market, bonds to gold etc. Mutual funds are professionally managed and provide investors with the opportunity to gain from professionally managed assets. They can earn from mutual funds in form of capital gains, and dividends.
Tax Saving Mutual Funds
Are a specific type of mutual funds, where under section 80C of the Income Tax Act, investors gain tax benefits. An individual or HUF (Hindu Joint Family) can claim up to $1,50,000 as a tax deduction from their total income when the tax is calculated. Tax Saving Mutual Funds are also called Equity Linked Saving Schemes (ELSS). ELSS are an instrumental way of saving taxes and have performed well consistently over the years. In tax saving mutual funds or ELSS, the investment is locked for three years, which means investors are not permitted to withdraw their investment before the period elapses.
How can you invest?
- Investors should always set goals before the dive into investing. Figure out what you are investing for. Is it to meet a short term goal for 5-10 years? Like buying a house? Or a long-term goal like planning your retirement? An investment is always better placed if made in accordance with a set goal.
- There’s no investment without risk of course. investors are always advised to plan in accordance with their risk tolerance. Before investing, always study past trends and performance of the investment vehicle you’re investing into.
- There’s one mistake that many of us commit which is – not reading the “Terms & Conditions”. Never invest blindly, ALWAYS read through Terms and Conditions thoroughly, it will save you from companies with malicious intent.
- Investors should always diversify their choice of investment vehicle. A diversified investment portfolio allows to you to minimize risks.