You may have noticed that people talk about Investing, but they’re often confused about what is Investment, how it works, its types, or how to get started. This beginner’s guide will explain how you can begin your journey.
What is investment?
Investment means putting your Money in a place (like Gold, Stock Market) where your Money can grow in the future and you can earn Profit/Income in the future. In simple terms, you use your Money to earn Money so that you can earn side Income or increase your Wealth in the future.
Why should you invest?
Investing helps your money grow over time. If you simply keep your money at home or in a bank, its value will decrease in the future due to rising inflation. Nowadays, the prices of things are increasing every year, whether it’s Daily Wages, Children’s Education Expenses, or Medical Expenses. If you want your money to grow faster than inflation, you should invest.
Life is unpredictable; there’s no guarantee of what might happen. It provides Financial support to protect you and your family from unexpected emergencies. If you need money suddenly for any reason, you can sell your Investments or withdraw the money and use it. It also helps you fulfill your dreams like buying a Bigger House, Saving Money for your Children’s Education or Marriage.
How does Investment Works?
To understand in simple language how Investment works, you first Invest your money in such a place (like Stocks, Mutual Funds, FD, Property) where if its value increases then the value of your money also increases. You can also invest your money in such a place which gives you regular income like – Dividend from Shares, Rent from Property and Interest from FD etc.
Another important part of how this works is Compounding. This means that you get a return on the return you receive – in simple terms, Interest on Interest. We can understand the power of Compounding with this example: If you Invest ₹10,000 per month at a 10% return rate for 20 years, your Investment will be ₹ 24 lakh, but you will receive approximately ₹ 76 lakh. This is the power of Compounding.
Types of Investment
Each investment has its own benefits and risks. Here are the main types of investments to help you understand them.
1. Fixed Deposit (FD)
In this, money is deposited for a fixed period of time and in return, interest is earned.
FD = Safe, Secure but Low Interest Received.
2. Recurring Deposits (RD)
You deposit a small amount regularly, which you get back with Interest over a period of time.
RD – Safe and Good for Small Regular Savings but the returns are limited.
3. Stock (Shares)
In this, you buy a small portion of a Company. If the Company grows, the Share price will rise, earning you a profit. If it falls, you could incur a loss. The Company also pays a Dividend.
Stocks – It offers High Returns but also High Risk.
4. Mutual Fund
This collect your money and Invest it in various Stocks, Bonds, Gold, etc.
Mutual Funds – These are good for beginners, less risky than stocks, but good for the long term.
5. Bonds
In this, you lend money to a Company or Government for a fixed period of time, on which you earn interest.
Bonds – In this you get normal returns but it is safer than Stocks.
6. Gold
It is highly trusted among Indians as it keeps you safe during difficult times. You can invest in it in various forms like Physical Gold, Digital Gold, Gold ETFs, and Sovereign Gold Bonds etc.
Gold – It is Low Risk, safe during inflation, and good for the long-term.
7. Real Estate
Buying a Property is a good Investment as the value of the Property increases in the future and you can also earn rent from it.
Property – The Risk is Low and you can earn regular income from it, but the Investment amount is large.
8. Government Schemes
These are long term schemes which provide tax benefits and the return rate is also fixed like PPF, Sukanya Samriddhi Yojana schemes.
Government Schemes – These are Safe and Low Risk and provide guaranteed Returns.
9. Insurance + Investment
These are the schemes which provide Investment opportunity along with Insurance such as life Insurance, Pension & Retirement Plans.
Insurance + Investment – It is Less Risky and a good option for the Long Term and also provides Tax Savings.
10. Crypto Currency
These are digital currencies like Bitcoin, Ethereum, etc. Their prices fluctuate rapidly, which can lead to High Profits as well as High Losses.
Crypto Currency – This is only for experienced investors as it carries High Risk with the potential for high Profits/Losses.
Mistakes Beginner’s Should Avoid
When Investing, Beginners should be aware of some common Mistakes, otherwise their Money will not grow well or they could even suffer losses. Here are some Mistakes Beginners Should Avoid.
- Invest without knowing the Basics – Beginners should always keep in mind that whatever they are going to invest in, they should first gather all the basic information about it and only then Invest.
- Blindly Trust Friends, Relatives or other Sources – Investing directly in someone’s words can prove to be a big mistake for us because that person may have personal benefit in it, hence always do your own research first and then Invest.
- Starting Without a Goal – We should always know our goals before Investing. Some may want to Invest for the Short Term, while others may want to Invest for the Long Term, for their Children, or for Retirement. Therefore, it’s crucial to first identify your Goals.
- Putting All Money in One Investment – Some beginners put all their Money into One Investment, which is Highly Risky because if it performs poorly, you could incur losses. We should always diversify our Money into various Investments to minimize Risk.
- Investing to get Rich Quickly – Some Beginners, in their pursuit of quick Riches, Invest in schemes or Stocks that carry a high degree of risk and should be avoided, such as Money-Doubling Schemes. A truly successful Investor always invests with patience and for the Long-Term.
- Not Starting Early – you shouldn’t think about starting Investing later or when you have more Money, because you can start investing as little as ₹100 per month. The sooner you start the better.
- Not check the Portfolio – We should regularly check our Investments, rather than investing and then forgetting about them. This helps us rebalance our Investments from time to time.
How to Start Investing
Getting started investing isn’t difficult; you just need to understand a few basics and keep a few things in mind. You don’t need a lot of money or a lot of experience to do this. You just need to understand this:
- Set your Goal First – First of all, we have to decide what our Goal is. In simple words, what is our purpose of Investing, such as securing our future, for Children’s Education or Marriage, for buying a Bigger House or for Retirement? Once the goal is set, we have to decide how much amount to Invest and for how long.
- Keep some Money for Emergencies – Before we start Investing, we should create an Emergency Fund for 3-6 Months of Monthly Expenses or for Emergencies like Medical Needs, Unexpected Expenses, or Job Loss. We can keep this money in a Savings Account or Fixed Deposit, where we get less interest but can withdraw it whenever needed.
- Start with a Small Amount First – You do not need to invest a large amount at once, you can start with as little as ₹ 500/month, after that as your knowledge increases you can increase the amount as per your budget.
- Choose Safe and Low-Risk Option First – If you’re new, try to start by Investing in safe and trusted options that have Low Risk, such as Mutual Funds, PPF, Index Funds, Fixed Deposits, etc. These are options where you can earn Good Returns and Start with a Small Amount.
- Learn about the Basics First – Wherever you are Investing your Money, first know the basics about it like – how much Risk is there in it, for how much time you have to Invest, if it is a Stock then all the details about the Company, if it is a Scheme then all the details about it etc.
- Use a Trusted and SEBI-Registered Platform – You can start investing by opening an Account through online KYC with your Documents. There are many trusted and SEBI-Registered Apps/Platforms for this purpose, such as Zerodha, Grow, Upstox, etc. Nowadays, most Banks also offer this facility, so you can invest through Banks as well.