Investment tips for beginners

Sanjay Khurana

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Legendary investor Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.”

Investing in stocks is a way to multiply your money over time. By regularly putting aside some amount to invest, you can see it multiply over the long term. That’s why it’s important to begin investing as soon as you start earning. The earlier you start and the longer your time horizon, the better it is. According to experts, the minimum time horizon for any investment should be at least five years.

Begin by setting your goals about what you want to achieve financially. You might have short-term goals such as saving for a home or a vacation, or long-term objectives like securing a comfortable retirement life or funding your children’s higher education and their wedding, etc.

Young investors need to focus more on growth and long-term wealth accumulation, while those closer to retirement should prefer income generation and capital preservation.

Set clear goals

Your objectives should depend on your life stage and ambitions. The more precise you can be about your goals, the easier it will be to sort out the best means to get you there.

Determine how much time you have to achieve each goal. You will have longer and shorter timelines for different purposes. In general, the longer you can give yourself, the less risk you’ll need to take on, and the more viable your objectives will be.

Be realistic about how much you can allocate toward your investment goals. This includes looking at your savings, regular income and any other financial resources you can put to work as you begin.

Most of us have several goals like saving for buying a car, down payment for purchasing a house, for wedding and long-term planning for retirement. Always prioritise your goals and work on them according to their urgency and importance.

The first step in any venture is the biggest. To know how much you can afford to invest is the first priority. Assess your financial situation carefully. Don’t worry if your funds are less than what you would wish, because it’s just the beginning. Remember, this is a marathon, not a sprint and you’ve got a long way to go.

Start with your income. If you have a specific skill set or interest, you can use it for earning additional income by freelancing and consulting.

Important factors

Asset allocation It is the most important factor responsible for wealth creation. The reason why majority of the people are unsuccessful in building wealth over time is not because they didn’t have enough money to invest, but because they didn’t invest their money in the right asset.

“The decision of asset allocation has over 90 per cent weightage in the successful journey of wealth creation. If your portfolio is strategically designed with the right mix of asset class, your dreams can turn into reality much sooner than expected,” says Saksham Diwan, assistant vice-president (wealth management), Anand Rathi Financial Services Ltd.

Optimise risk Every individual has a different risk appetite. Some may be risk-averse, some risk-neutral and a few might have no risk at all. Risk optimisation is nothing but making sure that for generating a certain amount of return, the risk associated with the portfolio is the least possible. This can be achieved only when you have the right mix of assets in a portfolio.

Mutual funds, ETFs Investors in mutual funds and exchange-traded funds (ETFs) have access to a diverse array of stocks, bonds and other assets. Since these instruments are managed by experienced fund managers, these are ideal for beginners and those who lack the knowledge to manage their wealth. Since investing is a long-term process, it is vital to conduct research and select mutual funds and ETFs that gel with your goals and risk appetite.

Pay off debt Don’t take more loans when you are still paying EMIs. Try to pre-pay the debt as early as possible by increasing the amount of your EMI as your income increases. In this way, the tenure of your loan will automatically come down.

Budgeting If you don’t have a monthly budget, you can’t have control over your finances. With the right budget, you can keep a tab on your spending and ensure that you never land yourself in debt again.

Contingency fund Creating an emergency fund is also very important. Ideally, there should be an emergency fund that can meet your regular expenses for at least six months. Better money management such as regular savings, systematic investment plan and cutting down on unnecessary expenses will definitely help in improving your personal finance.

Budget for investing Based on your financial assessment thus far, decide how much money you can comfortably put into stocks. This shouldn’t dip into any funds you need for expenses now or down the road. Investing in stocks carries risk, and it’s important to only invest money you can afford to lose. Never put yourself in a financially vulnerable position for the sake of investing.

Thumb rules for investing

Rule of 72 It is a simple formula that helps you estimate the time it takes for your investment to double. Divide 72 by the expected rate of return on your investment. The result is the number of years it will take for your investment to double. For example, if you invest Rs 1 lakh with an expected rate of return of 8 per cent per annum, your investment will double in approximately nine years (i.e. 72/8=9).

Minimum 10% investment This rule suggests that you should invest at least 10 per cent of your income every month towards long-term investment, while increasing your investment by 10 per cent each year or in proportion to the increase in your income.

100-minus-age rule This offers a framework for determining the appropriate equity and debt allocation in your investment portfolio. It suggests subtracting your age from 100 to find the suitable percentage of equity or stocks exposure. The remainder can then be allocated to debt instruments.

Remember, investing involves risks, and there are no shortcuts to accumulating wealth. It’s crucial to tailor your investment approach as per your needs, goals and circumstances.

KEY TAKEAWAYS

Diversify portfolio It helps reduce risks by spreading out investments across different asset classes such as FDs, mutual funds, stocks, etc.

Invest for long term Helps reduce risks and allows compounding to work its magic.

Keep emotions in check Making decisions based on emotions can lead to poor choices and losses. Don’t take decisions in a volatile market.

Stay informed Keep yourself abreast of the news and market trends.

Seek professional help If needed, consult a financial adviser. They can provide personalised guidance based on your financial situation and goals.

Patience and discipline Always stick to your investment plan. Avoid making impulsive decisions based on short-term market fluctuations.

Stock-taking Stocks can be organised by the risk they involve. For instance, large-capitalisation (large-cap) stocks are generally more stable since they are well-established, major companies in the market. Small-cap stocks usually offer more growth potential but come with increased risk. Similarly, growth stocks are sought for rapid gains, with higher risks, while value stocks focus on long-term, steady growth, usually with lower risks.