To invest or not to invest? Many beginners who are new to the investment world ask this question. It’s jarring to realize that our educational system doesn’t offer us much about finance and investing. But no worries! This article will thoroughly explore this question and justify why investing is essential. Also, we will explore the nitty-gritty of investing for beginners.
Introduction to Investing for Beginners
Investing is “allowing your money to make more money.”
Considering the macroeconomic conditions, investing is becoming a necessity rather than a hobby. It is an ever-growing field with virtually endless things to learn. World-class investors will suggest continuously learning and expanding your skillsets around the financial markets. Understanding everything in one day is impossible, but you don’t need to know everything related to investing to get going as beginners.
It’s always good to equip yourself with personal finance and to invest at an early age. However, it doesn’t mean it’s too late to build wealth through investing. Spending time to acquire even a fundamental knowledge of investing as beginners will put you ahead of your counterparts in terms of financial literacy and financial success.
What Is Investment Definition?
An investment is an asset that is built to generate more money in the future. All the investors hope that their assets will appreciate in value over time.
The additional money created from the investment can be used to satisfy various goals like retirement, emergency expense, purchase of other assets, and meeting obligations like loan payments, tuition fees, marriage, etc.
There are two ways an investment would generate additional money.
1. You can invest in a liquid asset and sell it at an appreciated value; the price difference is your profit. For example, stock market investing.
2. You can invest in a return-generating asset and earn income from that asset. For example, rental property income.
From this perspective, an investment is an asset that can be worth more than the initial amount or will create additional income over time.
Why Should You Consider Investing?
One word: Inflation.
You might have heard from your parents or grandparents about how cheap things (both products or services) were back in their time.
Inflation is to blame for eroding the intrinsic value of money as time passes.
Historically, from 1960 to 2021, the average inflation rate in India was 7.5% per annum. Overall, the price increase was 7,704.85%. An item that cost INR 100 in 1960 will cost INR 7,804.85 in 2022.
Currently, the entire world is going through an inflationary phase. China’s covid-19 lockdown policy and the Russia-Ukraine conflict have disrupted the overall production of goods worldwide and resulted in increased food prices and production costs. The U.K. and the U.S. recorded 9.1% and 8.6% inflation, respectively, as of May ’22. In comparison, India’s inflation rate was 7.04% simultaneously.
But the good news is that investing in quality assets can help combat inflation and generate wealth. Investing enables you to make your money work for you. Moreover, the value of your investment grows exponentially rather than linearly through compounding.
Compound earnings refer to returns reinvested to earn additional gains. For example, ace investor Warren Buffet made more than 99% of his total wealth after 52.
This explains the power of compounding.
Difference Between Investment and Savings: Investing vs. Savings
Before exploring the differences, let us review the similarities between investing and savings.
1. They’re vital instruments to meet human wants and needs.
2. They require putting the money away for future needs and wants.
Investing and saving differ in terms of financial goals, return potential, complexity, financial instruments, liquidity level, risk factor, custodian (brokerage or bank), etc.
Investing refers to buying assets that appreciate over time and provide higher returns. However, there are elements of risk. On the other hand, saving is putting money aside for emergencies or immediate needs with little to no risk.
Principles of Investing: Things to Remember Before You Start Investing
Before investing, one has to keep the following principles in mind to accelerate the learning curve and minimize the loss.
1. Risk and returns
Risk and returns typically go hand in hand in the investment world. Investments with higher profit potential carry an equivalent level of risk. Similarly, financial instruments with lesser risk offer limited returns. Intelligent investors know their goals and risk tolerance level and continually strike a balance between risk and returns.
For example, government-backed fixed deposits offer higher security but lower returns. In contrast, equities are linked to market performance offering a more significant rate of return along with increased risk factors.
Pro tip: One can opt for a low-risk financial product if the investment objective is just to offset inflation. However, if the goal is to accumulate wealth or retire gracefully, you must deal with at least a little risk.
2. Patience is the key
Long-term investments have a higher likelihood of yielding better gains. It’s because your investment needs time to grow and absorb the day-to-day ups and downs of the market.
Hence, one needs to be careful during market dips or economic downturns. Out of panic, investors sell their investments (particularly high-risk instruments) even though they are fundamentally strong assets. They make a substantial loss and miss out on the profits once the market recovers.
Pro tip: Your investment’s time horizon depends on your goal’s magnitude. Accumulating generational wealth or building a retirement fund needs a long-term mindset while investing. A short time horizon is enough to meet objectives like vacations and car purchases.
3. Investing early gives an advantage
Financial expert Suze Orman said, “I would much rather see you invest a specific amount of money when you are young, even a lesser amount, than waiting and having to invest five or six times (as much) when you are older.”
Investing early in life gives you two benefits —
1. You will benefit from the effects of compounding.
2. You will have more time to recoup the losses made when investing as beginners, which is your learning phase.
Pro tip: It’s advisable to take financial risks when younger than at a later stage of your life.
4. Invest regularly
Consistency is the key to wealth accumulation. Many people do not realize how quickly they can build a sizeable corpus by regularly investing.
Let me illustrate using an example. Let’s say an initial investment of INR 1 Lac generates an annual return of 12% for the next ten years. Suppose no additional deposits are made into the investment account. In that case, the initial fund will generate a profit of INR 210,584.82 in this time frame.
Let’s tweak the scenario a little — If you add INR 500 every month into an investment account (containing INR 1 Lac), your profit will have grown to INR 261,549.84 in 10 years.
Pro tip: Irrespective of the market condition, it’s better to do dollar cost averaging (DCA).
5. Diversify your portfolio
Diversification is the act of spreading your investment across multiple investment vehicles to minimize risk.
There is an adage saying, “don’t put all of your eggs in one basket.” You can choose different asset classes based on your risk tolerance and the level of volatility you can handle.
Pro tip: The ‘120 Rule’ of Investing is a well-known portfolio diversification approach. You need to subtract your current age from 120, and the resulting number is the percentage of your total investment fund you should invest in stocks. The rest can go to other investment classes. With the increase in age, the proportion of stock investment decreases. This strategy assumes that young investors can take more risks by investing in equity.
What Are the Best Investment Options for Beginners?
Choosing suitable instruments can be challenging, considering the availability of a wide range of investment options. Only with a clear understanding of your investment objectives it becomes easy to identify where to invest.
Below is the list of financial instruments in India for beginners to explore.
An equity investment refers to the money invested in a company by purchasing its shares in the stock market. Investors buy shares/stocks with the expectation of an increase in the value of the principal amount invested and/or earning dividend income. As it’s linked to market performance, the rate of return can be either positive or negative.
Bonds are fixed-income investments that represent a loan provided by investors to borrowers, typically corporates or governments. Bond investors receive income in the form of interest payments at regular intervals. They are less volatile, and they offer lower returns.
3. Fixed deposit (FD)
An FD is a fixed-income instrument offered by banks or NBFCs (Non-banking financial companies). It is considered the safest investment option that guarantees consistent interest rates and zero market-related risks. As it’s virtually risk-free, it offers lower returns (3% to 7%), slightly better than savings account interest.
4. Mutual funds
A mutual fund pools money from investors to purchase a portfolio of stocks, bonds, or other securities. It is managed by professional fund managers, offering the benefits of diversification. There are also mutual funds that don’t require active intervention (like index funds). The volatility and the return potential of a mutual fund depend on the underlying assets. Equity mutual funds are volatile and generate higher returns than debt mutual funds.
5. Exchange-traded funds (ETF)
ETFs are similar to mutual funds, except they are bought and sold in real-time (like stocks) on exchanges. In contrast, mutual funds are traded based on their price at the day’s end.
7. Public provident funds (PPF)
PPF is a fixed-income investment product offering fixed-interest returns and tax-saving provisions. The minimum and maximum deposit range between INR 500 to INR 150,000 in a financial year. It was introduced by the Ministry of Finance in 1968, and the Central Government of India fully backs the scheme. All funds received under this scheme are credited to the National Savings Small Fund (NSSF) and are invested in central and state government special securities and in various public agencies like the Food Corporation of India, National Highways Authority of India (NHAI), and so on. The interest rates are subject to quarterly updates and currently stand at 7.1% per annum.
8. National pension scheme (NPS)
NPS is another government-backed investment product offering fixed returns and tax-saving provisions. However, the lock-in period is till the age of 60. The funds received under the NPS are invested in various asset classes, including equity, corporate debt, government bonds, and alternative investment funds. The average 10-year CAGR generated by NPS comes to around 10% per annum.
9. Sovereign gold bond (SGB)
SGB is an excellent alternative for investors who want to experiment with gold. It’s a low-risk, tax-free investment product that eliminates making charges and storage expenses, as it’s entirely digital.
10. Real estate investment trust (REIT)
REIT refers to companies that own or finance income-generating real estate properties. They hold different commercial properties, including office space, warehouses, hospitals, hotels, etc.
In simple terms, it is a mutual fund for real estate properties. It is an excellent investment option for those looking to invest in real estate and enjoy the benefits of liquidity, safety, affordability, and diversification. Typically, REIT leases various real estate properties, collects rents on them, and then distributes the income as dividends to shareholders.
Cryptocurrency is a digital or virtual currency developed with the help of blockchain technology. In the past decade, cryptos have evolved into a critical asset class, like stocks and bonds.
Investing in Crypto
Crypto investing takes many forms. You can buy or sell cryptocurrency directly, invest via an online platform or invest in crypto funds and companies.
Regardless, Mudrex Coin Sets is the best way to invest in crypto for beginners. These are themed collections of crypto tokens that thematically invest in top coins under different categories. They are periodically rebalanced based on their performance to offer investors better risk-adjusted returns.
How Much Money Do I Need to Start Investing?
It’s easy to think that you can’t invest in small amounts. But fortunately, most financial products don’t require huge investment capital, to begin with, besides a few exceptions.
Below are some examples of investment vehicles and their minimum amount requirement.
1. Crypto = INR 100. Get started now on Mudrex!
2. Mutual Fund = INR 100 per month for SIP and INR 1000 per contribution for a lump sum investment
3. Public Provident Fund = INR 500 in financial year
4. Nation Pension Scheme = INR 500 per contribution and INR 1,000 in a financial year
The earlier you can start investing, the better — even if you start small. But before you commit large sums of money to investments, improving your financial literacy is essential.
What if I Have a Lot of Money But No Investment Experience?
Financial literacy is a must before starting to invest.
It is a crucial tool for both growing and maintaining your wealth. It can help you fight against inflation, reduce your tax burden and protect you from economic uncertainty.
Irrespective of whether you have a lot of money or not, it is vital to spend time educating yourself to at least understand the basics of investment. After which, you can start with smaller funds to get first-hand experience before deploying larger funds. In that case, even if you make a loss, it wouldn’t affect you much.
Suppose you don’t have sufficient time to invest by yourself after gaining financial literacy; consulting a financial advisor or an accountant is advisable. A professional advisor can help you explore options, discover the right solution and help you build a diversified portfolio. Else, newbie investors might make mistakes that may cost them dearly.
In any circumstance, educating oneself is a must before investing.
What Are the Risks of Investing?
Things are, of course, not straightforward when it comes to investing.
There are multiple risks involved when dealing with financial products. Below is the list of risks you should be aware of –
1. Market risk
It refers to a decline in the intrinsic value of an asset due to unfavorable economic development or events affecting the entire market. This risk could be caused due to exchange rate fluctuations, interest rate hikes, or regulatory changes.
2. Liquidity risk
It is the inability to sell your asset at a fair price and take the money when you want. You might end up selling your investment at a lower price, or you might not be able to sell your asset at all in instances of low liquidity.
3. Concentration risk
It is the opposite of diversification. The scope of loss increases when investors concentrate their investment on only one or a few assets or asset classes.
4. Credit risk
Credit risk is relevant, especially for debt instruments like bonds. It refers to the scenario where the bond issuer (government entity or company) runs into a financial crisis and cannot pay the interest and/or principal at maturity.
5. Inflation risk
Inflation erodes the purchasing power of your savings over time. Hence, your investment should provide returns that safeguard against inflation. However, the inflation risk arises when your investment portfolio yields net returns below the inflation rate.
Suppose you’re just beginning to explore investing. In that case, gaining financial knowledge and knowing about your risk tolerance and financial goals is imperative before locking your money in any financial products.
Some instruments, like debt mutual funds, allow quick access to money during emergencies. On the other hand, stocks or cryptos should be part of your long-term investment strategy.
Investing comprises a variety of risks, but the most significant risk of all is not taking one. Hence, invest your money wisely.
1. Can I invest as little as $100?
Yes. In fact, you can invest as low as INR 100 in India, which is ~ $1.21.
Below are some examples of investment vehicles and their minimum amount requirement.
1. Bitcoin = INR 100
2. Mutual Fund = INR 100 per month for SIP and INR 1000 per contribution for lump sum investment
3. Public Provident Fund = INR 500 in a financial year.
4. Nation Pension Scheme = INR 500 per contribution and INR 1,000 in a financial year.
However, the minimum investment requirement varies based on geography.
2. How do you start investing when you have no money?
Considering the macroeconomic conditions, investing is becoming a necessity rather than a hobby. Hence, it is essential to set aside small amounts of money by compromising on a few things in your daily routine, like eating outside, making expensive purchases, etc.
Firstly, you should track your spending habits and identify areas where there is scope for savings. Secondly, you can start with investments providing fixed or regular income like bonds to accumulate good returns. After that, you can gradually allocate some of your funds to risky assets.
3. Is Bitcoin a good investment?
Yes. Though it has fallen from its all-time high of $69,000, it has beaten its previous highs in each cycle. Also, Bitcoin is the safest asset within the crypto space, considering its track record and market cap. To best reap the benefits of Bitcoin’s appreciation, it is advisable to do dollar cost averaging.
4. Where can I put my money to earn the most interest?
Crypto and the stock market offer the highest returns. Cryptocurrency is a digital asset developed with the help of blockchain technology. Stock refers to owning a piece of business with the expectation of an increase in its intrinsic value and/or dividend income.