Tuesday, October 19, 2021

Investing Money For Beginners: Your Bible On What, Where and How To Invest

The recent Covid-19 pandemic has made many jobs redundant. We are now months into a cautious and calculated world where there might be a danger at every corner. This leads to stress and anxiety. People are increasingly falling prey to poverty as employers are unable to bear the burden of their workforce. Most people are regretting not beginning to invest early and some are still not taking the first step because investing money for beginners can be pretty confusing and intimidating.

But before you start blaming the government, realize that this is a global crisis. If India had a negative GDP (Gross Domestic Product) growth then so did the rest of the world. Now is not the time to blame, but to rethink our financial outlay. We at Uncut Globe are here to relieve you of some of the anxiety that Covid-19 has brought to the surface.

Why is there a greater need to invest now than any previous year?

The world is dwindling with a financial crisis like never before. There are high chances that you might have come across a few people who went bankrupt during the crisis. Worse, you might have reached the edge yourself. If you luckily still have your finances in place, don’t underestimate the unforeseen wrath of nature. This year is a lesson and all we need to do is prepare ourselves for the future. 

Let’s begin with the basics of investing money for beginners

To begin with, the basic rule of investing is to utilize sources of earnings or any other funds you may possess and put it in an investment vehicle to at least match the rate of inflation prevalent in that currency and region. 

The inflation rate in India was 5.5% as of May 2019, as per the Indian Ministry of Statistics and Programme Implementation whereas the average rate of interest provided by banks on Fixed Deposits (FD) can be anywhere from 5.3% to 6.7%. 

This should be enough to make you rethink your savings. 

Are you really investing it or barely keeping level with the inflation rate. If you just save 10-20% of your salary and put it all into a Fixed Deposit, then I’m afraid that’s not optimum investing. 

First know what type of investor you are

The world of investment is vast. If you do not know where to look, you can get lost. Before you begin to look at the different investment vehicles available to you, first ask yourself what level of risk you want to expose yourself to. To arrive at that, consider your age, income level, desired liquidity of the funds, and risk preference. 

For example, a senior citizen would be more risk-averse than you and would prefer more funds in small-term, low risk, and low return vehicles. A young guy starting off his career would be more open to high risk and high reward type scenarios. Also, consider the periodicity of investments- Do you want to open a SIP (Systematic Investment Plan) or rather have a one-time investment? 

Once you know what kind of an investor you are and the expectation you have from your investments we can move on.

The Various Investment Vehicles Available To You

There is one key rule to remember in investing – high risk leads to high reward whereas low-risk yields low returns. The equity market or share market is volatile. Someone who is not savvy with market trends and has no prior experience with financial or even technical analysis should not enter it. That will only lead to unexpected losses and a wrong belief that the stock market is unpredictable. For such novice investors, a good way to benefit from equity markets without directly trading in them is through mutual funds. 

Mutual Funds (MFs) are products which derive their value from the base equity shares they represent. One MF may have 10 equity shares belonging to different industries and having different elements affecting them. Mutual Funds are divided into small, medium, and large cap funds. 

We will discuss more in detail about Mutual Funds in a later articles but first let’s make things more clear on investing money for beginners.

Then there are Exchange Traded Funds (ETFs) which are like mutual funds, a basket of securities that may have foreign market shares as their base shares. For example, Motilal Oswal NASDAQ 100 ETF

Then there are Public Provident Funds (PPFs) which have a lock-in period of 3-6 years but are EEE rated products, i.e. the contribution is eligible for exemption under the Old Tax Scheme under Section 80C, interest and maturity proceeds are also exempt from tax. 

There are Provident Funds (PFs) that are managed by employers for their employees. There are also Pension Schemes for government employees. There are debt instruments such as bonds and debentures floated by companies that give a percentage of interest-based on the coupon rate of the bonds. There is also a commodity market but in India that allows for trading commodity futures and options. You also have an option to buy gold or real estate as investments.

How do you choose where to invest?

A basic rule of thumb in this matter is that you should invest 30 percent of your investable wealth in risk-free securities. 

Risk-free rates are provided by government bonds and notified by the Bank of Europe through the LIBOR (London Interbank Offered Rate), which will be changed to SONIA (Sterling Overnight Index Average). It is the minimum return you would expect if you would invest in near 0-risk securities. This 30 percent should be free from the risk of principle erosion and preferably liquid so you may obtain funds in case of emergencies. 

Some people prefer buying and holding onto gold for this purpose.

Out of the remaining 70 percent funds, you should invest 50 percent in low to medium risk investments like ‘medium-risk mutual funds’ or blue-chip stocks.

The government has recently mandated Mutual Fund firms to grade MFs based on risk and introduced a very-high risk on its ‘risk-o-meter’ tool. 

The remaining 20% should go into high-risk investments that have the possibility of bearing the loss.

But then again, 20% of your set-aside investable amount is something that you should be ready to lose may a worst-case scenario arise. Invest this amount in potentially viable businesses and stocks that show promise in the new future. Invest in sectors that will reap benefits in the future such as companies in renewable energy, cryptocurrency, electric vehicles, etc.

And there you have your diversified investment portfolio in addition to tips on investing money for beginners

Once you have observed these rules, you will have a well-diversified portfolio with your risk distributed onto multiple sectors and vehicles. You can sleep soundly now knowing that your money has been put to work and is working even when you are not. You should check how your investments are doing periodically but you should not worry about minor down-swings in the value of your investments. 

Remember that bitcoin rose to $20,000 levels in 2017, then back to $3000 at the end of 2018, and is now climbing back up to $20,000 levels as we write this. Fluctuations in the market are not rare, so you should keep calm in such situations and not sell-off in red zones in a hurry. Consult professionals regularly and keep updated with news and trends about your company and where your money is invested, and you should be fine. Investing can be fun when you know what you are doing. So, play safe and do not gamble your money on something you do not understand.

Rahul Sinha
Rahul is a B.Com(Hons) graduate from Delhi University and a CA final candidate. He is also the co-founder and CFO of a healthcare start-up based out of New Delhi, India. Rahul is an avid investor and holds a diverse portfolio. Having worked for 3+ years with Deloitte in Statutory Audit and then later in a tax profile, Rahul believes in understanding the bottom-up functioning of established businesses and leverages this very knowledge to create value through his company. His next challenge lies in Germany where he will soon be pursuing his masters degree in Finance.

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