How to invest the right way? (For Beginners)
One of the most commonly asked and well-known interview questions is — “Where do you see yourself in the next 5 years?”
Now, if I were to ask you the same question, but instead of naming a designation or describing a role, I asked you to tell me where do you see yourself financially in the next 5 years? Would you have an answer to that? Would you know how to achieve that goal?
In this article, I am going to talk about some of the investment advice I have received from various sources so that you don’t make the same mistakes that I made.
When is the right time to invest? NOW. This is a lesson I learned the hard way. How I wish that I could go back in time and start investing as soon as I started earning money, or invest even a part of my pocket money instead of letting it rot in my savings account. With investments, the sooner you start the better.
Let’s talk about where to invest your money? There are two buckets that investment products fall into and they are financial and non-financial assets. Financial assets can be divided into market-linked products (such as stocks and mutual funds) and fixed income products (like Public Provident Fund, bank fixed deposits). Non-financial assets include the likes of physical gold and real estate. There are many options to invest money in — Stocks, Bonds, Mutual Funds and ETFs, Bank Products, Cryptocurrencies, Provident Fund, Real Estate, etc. All these investments come with their own set of features and risk factors (I have explained the types of investment options in detail here — https://hanandarugar.medium.com/types-of-investment-plan-8081bb2c2882).
With so many options, how should one decide which product to pick? All of us want to get rich fast, we want to get quick sky-high returns with low-risk factors.
Unfortunately for us, the “high-return, low-risk” combination doesn’t exist. Returns and risks are directly proportional to each other. The greater the risk, the greater the rewards. Everyone has their own risk appetite, in your early 20s, you can take more risk than in your 30s or 40s. Your responsibilities increase with age. You might have to deal with EMIs, kid’s education, medical bills, plan for retirement, increased household expenses, etc. So do your research thoroughly consider your risk appetite and goals in your mind before you make an investment. The best option is likely a combination of products that balance risk with the potential for growth.
There are a lot of channels that give you a really well-informed and researched analysis and recommendations. What stocks to buy, which Mutual fund to invest in — whether to go with SIP or lumpsum amount, what are the risks involved, gives you a SWOT analysis and insights. In this article, I am not going to talk about which stocks to invest in, instead, I am going to talk about how to invest and the attitude to have while investing. But if you need recommendations or which channels to follow, let me know in the comment section.
I am an advocate of the invest and forget approach. This might not work for all the investment avenues, especially stocks. But I try not to get influenced by the ups and downs of the market. I try to buy stocks when the market is down but I don’t panic sell them when the market is down(or up for that matter). Because I believe in the company’s capabilities to get back on track, and I have done my research thoroughly in the company that I will be investing in. This might not work in my favor always but that's where combinations of products and diversity in investments come into the picture. Some investments might perform poorly, some might perform better than I expected but in the long run, all of them together have the potential to generate higher inflation-adjusted net returns.
Now that we have talked about when to invest and the various investment options available to us, let’s talk about how much to invest? Life is unpredictable, you don’t know what’s going to happen next. You might end up living up to the age of 100 or might die in the next few days. You need to be prepared for these scenarios, have enough funds to live comfortably after retirement, and leave something for your dependents to survive after you (that's where life insurance comes into the picture). But having said that, we have to keep some money aside to pay the bills, EMIs, rent, food expenses, etc. You also want to enjoy your life — take that vacation, go to that expensive restaurant once in a while, buy that new iPhone, go to the nice spa in the neighborhood. On top of all of that, you also have to invest money for the future. Seems like an impossible task but it’s actually really manageable if you plan it right.
Ever heard about the 50–30–20 rule? The 50–30–20 rule of budgeting states that 50% of your income goes towards your needs, 30% of your income goes towards your wants and 20% of your income goes into your investment.
This 50–30–20 rule seems really interesting if you have just started investing or started earning recently. But as you progress in your professional life and start earning more money, you need to increase the percentage of your earnings that go into investments as well. Your needs should essentially remain the same, and you should always keep aside 30% for your wants, but the extra income should go towards your investment.
There is a really helpful video on YouTube by Ankur Warikoo where he has explained how to budget your income and how by the power of compounding you will see astonishing results. Though the video is in Hindi, it comes with English subtitles.
https://www.youtube.com/watch?v=5uaXq-xDp2g
He has also given a calculator to budget and see what your future investment looks like based on your income.
This will really help you plan your budget and trust me when you see the amount you have saved up via your investments, it will motivate you to invest devotedly for the next few years.
We know how much to invest and in what, but how do you invest and track your investments? Going to the bank, filling up forms, submitting copies of address proof, identity proof, then answering calls from their customer support, all add up to a very painful experience. In this digital age, we have a plethora of investment apps available in the market. My personal favorite is INDMoney. It not only lets you track and invest at Zero Commission but also helps you plan goals and grow your future net worth. You can even manage your finances across family members, and now you can invest in US stocks at Zero Commission. Let me know in the comment section if you have a favorite investment app.
As a bonus, you can download the app using the link below to get popular US stocks worth Rs. 150 (It’s a small amount but it’s free money and as I said, invest and forget).
https://indmoney.onelink.me/RmHC/153727c8
Let me know if you want me to write an article explaining investment options in detail, how compounding works, or where I invest my money.
So to conclude, start investing now and have a judicious mix of investments keeping risk, taxation, and time horizon in mind.
