In Today’s world, the word “investment” covers things ranging from stock to education. But mostly referring to a stock, equity market, bank FD an investment is still in daily use. Don’t confuse when someone says “I want to invest in my education/car etc”. Simply put, you want to invest in order to create wealth.
Here I will outline some basic in-out of investment and common terms related to it.
The most prudent reason why someone invest is in order to get better returns over a period of time may be or may not be in form of money. Another important reason for investment is to meet the rising cost of inflation. Inflation is the rate at which cost of living increases. For example, if there is a 6% inflation rate for the next 10years, a $100 purchase today would cost $179 in 10 years. For any long term investment, inflation should be considered as a major factor. For an investment not to decrease in value, it should provide a return that beats inflation rate.
This is a basic term which everyone knows no mater how financial sound one is. When one borrows/lends money, then it comes with a charge of using it. This charge is known as interest. It is usually calculated on the principal amount and depends on the mutual agreement of both the parties. The rate of interest may remain constant for the life of the loan/agreement or may vary depending on the terms of the loan. Bank FD can be a good investment depending on the rate of interest.
When to start investing:
The sooner the better. The early you start investing, the more solid decisions you will be able to make about your investments. It will provide your investments more time to grow. Also the concept of compounding will increase your investment more, by combining principal and interest/dividend earned on it, year by year.
The 3 golden rules of investment are :
– Invest early,
– Invest regularly,
– Invest for a long term
Physical assets: Investments in like real estate, gold/ jewelry, commodities, car etc basically comprises physical investments. Financial assets: Investment such as FD (Fixed Deposits), Post office schemes, insurance, pension fund, equities, bonds etc are known as financial assets. Government bonds, Bank FD, Pension plans, real estate etc are considered as a low risk investment options while equities, gold, oil, derivatives etc are considered as high risk investment options. There are investment options for each level of risk.
Investment options vary depending on for how much time you want to stay invested. If you are looking for short term investment then saving account, Bank FD, Equities etc are good for you. Other options like real estate, bonds, Bank FD, Company FD, Pension Plan etc are for long term investors.
What is your risk appetite? The more risky a investment, the more profitable it can be in future. Take out some time to sit with your financial agent and try to understand various investment options available in market and risk associated with them. Look for investment products that are within your level of risk. For a new bee, its always advisable to start with something less riskier to build up the confidence.
Once you have zeroed on your investment plan based on your risk appetite, you need the appropriate tool to realize it. For example, for FD, interest rate differ across various depending on then term of FD. But most of the bank have minimum FD amount as well. Do a market research and choose the best in terms of return and tax liability on maturity. In the same way, for equities, go for the broker which charges less fees and provide you tools for market research. What a bank is for FD, a broker is for equities. For real estate, a local property dealer of target area can be of much help.
Ensure before investing:
Before you finalize the investment, you should read and understand all the terms and conditions and should get everything in written explaining the investment. It’s always safe to deal with authorized/approved intermediary only. Its to ensure that your money is in safe hands. Always consult with your financial adviser, or friends/relatives who had done such investment in past, on your investment decision and verify the legitimacy of the investment.
Always keep money aside for rainy days. You never know when you may need that. This money should be quickly accessible like in a bank account (you can withdrew from ATM), money kept in locker etc. Taking benefit of employer-sponsored 401K plan, insurance etc cost less and increases your saving/investment.
These common investment points will help you at each and every step. Happy investing.