Investments is often a term associated with large amounts of money, in most people’s mind. But the credit for this misinterpretation goes entirely to assumptions often made by those with partial or no knowledge about investments. But a little bit of research and you will discover that investing isn’t an option restricted only to the wealthy or the “well-off”.
You can start investing regardless of how much you earn, with a little bit of planning. Don’t fret, we’ve got the basic ready for you to get you started on your investment journey.
Step 1: Calculate Income, Expenses, and Liabilities
Begin with noting down how much you make in a month. Calculate all your monthly expenses (which includes your monthly bills, groceries, fuel/ transportations costs, necessities, etc.) Next calculate your liabilities( which includes monthly EMI’s, loan repayments, interests for loans, etc.) Now deduct your expenses and liabilities from the income, and you have the money you have left to benefit out of, let’s call it the excess money.
Tools you can use to manage your money:
- Excel Sheet on your desktop/ laptop
- App: Money Manager, Expensify or Walnut
Always remember to calculate and invest at the beginning of the month or whenever you earn your salary.
Step 2: Create an Emergency Fund
An emergency fund refers to some amount of income that you set aside in case of emergency, usually in the form of cash or another such liquid form. This can and should be used only during unforeseen circumstances. So, create this fund in your savings account before you start investing.
How much should you save in your emergency fund?
Enough money to survive for 3-6 months.
Step 3: Calculate your Risk Assessment
Once you have determined the amount you have to use at your discretion, you need to take several other factors into consideration before you start investing. Here are some factors that may determine your investment decisions:
1. The objective of Investment: You invest either to preserve or protect your capital, or you invest to earn or multiply the savings you have. Here are a few different strategies you can adopt when you begin investing:
- Safe investing: wherein you take low risks as you need the money soon. For example, you may be investing to buy yourself a phone in about two months, so if you take too many risks, you stand a chance to lose the money you saved.
- Moderate risk investing: wherein you don’t specifically have a goal in mind except to appreciate whatever money you may have saved. Hence, you may invest in mutual funds that pay you dividends and also maybe reinvest those dividends.
- Aggressive risk investments: where you take high risks to earn higher returns. This usually means investing in high-risk mutual funds and equities on a long term basis.
2. Risk Tolerance: We all know The famous saying – No pain, no gain. Similarly, if there is no risk in investment, there would be no returns. Thus understand and analyze how much risk you are willing to take and then go on to choose your mode of investment. For example, if you are a risk-averse individual, you may opt for recurring deposits. If not, equity investments would be an ideal choice.
3. Time: Here we refer to the time within which you require the money. If you are investing for instant returns, then your choice of investment will vary from those who invest with retirement in mind.
4. Age: We say age is just a number, and it is absolutely true. There are no limitations on the age when you are investing, but it is always better to start early as it buys you more time to recover from losses, in case of any. You also benefit from the power of compounding when you start investing early. It also gives you a chance to earn more as longer your investment period, higher the chances of you earning more from investments.
Step 4: Start Investing
You can now start investing in the market. Now all you have to determine is the type of investment you want to put your money, based on all the factors above, of course. Two very commonly used methods of investment are:
- Stocks: When you buy a stock, you’re buying shares of ownership in a company. The price per share can range from less than a hundred rupees to thousands of rupees, it is up to you to determine how much you want to invest. Investing in stock might be a bit on the riskier side, as you will have to take full responsibility for the stock you own, in case of any loss. It also means that you will have to keep track of the market and the prices constantly to keep track of its performance. However, during gains, it also works in your favor. But in general, the risk factor is high, and thus it isn’t the most recommended form of investment for a beginner. Moreover, diversifying your investments is an essential part of investing in stocks for which you need a large sum of capital. If you’re looking to buy stocks, you can check this out: Top 5 lessons you need to pick up stocks!
- Mutual funds: If you’re not interested in making single investments in stocks and bonds, you may consider mutual funds, which pool investor money and buy a diverse range of many investments. In India, the minimum amount you need to invest is Rs.100 if it is a SIP and Rs.1000 for a lump sum. Mutual funds provide the cushion of diversification. This is helpful as the risk gets spread out and in case one sector is going through a difficult phase, there may be another that is going through a profitable phase. This translates to lower risk while retaining the chances of gain. In addition, these funds are managed by professionals and hence the investors can be relieved of constant monitoring of the investment. Thus, it is safe to say that mutual funds are quite a good deal for part-time investors or even amateur investors today Here is a link to some of the best mutual funds investments for beginners in India.