The fact that you have landed on this page proves that you want to know about investment. I have personally observed that in India, there are not much online info about investment basics for beginners. So I thought to write a blog specifically dedicated for beginners. Before we go into more details, let me ask you that ARE YOU SAVING MONEY?
The chances are that, you had already been saving some money from your income. Believe me this is already half way through. Most people in India are not able to invest money because they never have those spare amounts. Not knowing how to invest is a different matter. But not having enough for investment is a more basic bottle neck.
Hence, if one is already able to save money, a big milestone is already achieved. Now you want to invest those savings and make it GROW FASTER. As you are starting new, brushing-up some investment basics that a beginners must know is essential. Why one saves money? Want to use this for higher education for child?
Want to buy a new car? Want to buy a new house? Or simply you need to use this money for a family’s world tour? Point is that, there can be varied reasons for savings. But it is of paramount importance to TAG A GOAL with all savings & investment. Not all investments are done with same goal. Goal-less can be as ineffective as no savings.
As all of your savings should have a purpose, one cannot afford to practice CARELESS INVESTING. Before starting to invest, a beginner must develop reasonable understanding of investment basics. In India common people are not as skillful in investing money. I hope this article will help the beginners to build some basics before entering into the risky world of investing. Investing is ‘Risky’ and lets not deny it. But the majority of risk is self-made. Lack of our own investing-know-how enhances the risk factor associated with investing.
(1) Why Investment is Needed?
Investment gives money the ability to grow faster. Suppose one has $1,000 to be invested in stocks. If the invested money grows at the rate of 12% p.a. (average returns of stock market in India), it will grow to $30,000 in 30 years. In the span of 30 years, the money grows 30 folds. If one do not invest, the same $1,000 will eventually get spent.
It is also possible that $1,000 lie dormant in some savings account. This money will also get spent (as it is not locked) or it grows at snails pace. If one is able to save money, assigning those savings the RIGHT INVESTMENT VEHICLES is like a top responsibility. A beginner must remember this investment basics as a number one concept. Investing gives money the POWER OF COMPOUNDING. Investment gives your money the power to grow faster.
(2) Start Investment Systematically
It may happen that one does not have a lump sum saving of $1,000 for investment. Instead the maximum one can invest is $4 per day (say). If one can invest just $4 per day for next 48 years, the accumulated wealth one can acquire is one million dollars. Suppose you are only 20 years of age as on today, after 38 years you would be just retiring.
Consider yourself carrying million dollars in your hand which has been generated with almost zero effort. Let me tell you one thing, retiring with financial independence (having a million in your kitty) will allow you to lead a stylish lifestyle. This is another investment basics for beginners that must be practiced to perfection. It is called as systematic investment. Do not burden yourself with goals of investment lump sum money. Instead start a systematic investment plan and put your money to work.
I have set a target of investing $4 per day through out in 38 years span. But ones investing power grow with age as people become less financially dependent. So in case you have less than 38 years before retirement, still you stand a good of becoming a millionaire by increasing the target of $4 per day. Suppose you can invest $8 per day, you will need only 32 years to reach a million mark.
In order to keep it simple just remember that in order to build a fortune you must invest your money. It takes only minimum effort to set aside a small amount each month and make your money grow.
(3) How Power of Compounding Works
This is one of the most important investment basics that one must learn. If a new investors can understand the concept of compounding of money, investment becomes almost irresistible. All investment basics for beginners starts with emphasis on power of compounding. Realization of power of compounding helps investors to take wiser, long term decisions.
How to make compounding of money work for self? A person can start investment effectively without going into the complicated details. We common men can simply start a Systematic Investment Plan (SIP). Systematic investing is one of the best tools available for common men. Start SIP in equity linked mutual fund and staying invested for 7-10 years itself can help generate great returns. Just by starting a SIP for long term, one can straight away make 15% p.a. return without any fuss. Yes, its this simple. Only care one has to take is to select a right mutual fund. Right fund, systematic investing & long term holding will trigger the power of compounding. Lets see how a tabulated data; it specifies how one-time investment of $100 grows at different interest rates and maturities.
– Five percent (5%) interest will fetch you the same returns as that of savings account.
– Ten percent (10%) return is slightly less than the average annual return of stock market.
– Fifteen percent (15%) return is possible from stocks if one can simply start a SIP for long term.
– Twenty percent (20%) return is possible by investing in top rated growth funds held for more than 10 years.
Year | 5% | 10% | 15% | 20% |
1 |
$100 | $100 | $100 | $100 |
5 |
$128 | $161 | $201 | $249 |
10 |
$163 | $259 | $405 | $619 |
15 |
$208 | $418 | $814 | $1541 |
25 |
$339 | $1083 | $3292 | $9540 |
You can see how $100 is getting compounded with increase in few percentage points and tenure of investment. At 20% returns, $100 becomes $249 if we keep it invested for 5 years. But the same $100 gets compounded to $9540 if we stayed invested for 25 years. Why is the difference between in returns with a small percentile changes here and there? You are witnessing the miracle of compounding of money. Compound interest can let your capital earn huge fortune. By small increments in investment tenure or in annual return, the ultimate result on capital is exponential. As seen above, $100 invested at the rate of 15% per year will have dramatic compounding with varying time. You will notice that the multiplying power of invested money dramatically increases with time.
Year | 15% | Remarks |
1 |
$100 | Invested amount |
5 |
$201 | Multiplied by 2 |
10 |
$405 | Multiplied by 4 |
15 |
$814 | Multiplied by 8 |
25 |
$3292 | Multiplied by 32 |
(4) Start Investing As Early as Possible
This investment basic, a beginners must remember for life. Let us introduce you to two teenagers (age 18) Jack and Mike. Jack decides to save and invest (@12% per annum) $1000 each year till his retirement (60 years). In this 42 years Jack amassed one million ($1,000,000) making him financially independent.
Mike on the other hand led a lavish life till 40 years of age. Every year he renews his car and spends his money on a expensive gadgets. When he was 40, he realized that he must save for his retirement. He started saving aggressively and invest $10,000 annually (@12% per annum) for the next 20 years. But even such aggressive investment (10 times more than Jack) did not fetched one million in 20 years. The idea that I am trying to inculcate is this, the best investment basics for beginners is to start investing as early as possible. This will give your money adequate time of compounding. Once we invest our money, we let the money work for us instead of we working for it.
Ready to invest?….not so soon…
After all theoretical concepts on investment basics for beginners, you probably are now anxious to invest in stocks. Not so fast, now you can barely walk, but will have to walk soon. Now that you know the importance of compound interest, lets discuss another important aspect of investment basics for beginners.
Suppose you have a debt of $5,000 owed to a credit card company. These institutions charge >30% interest on credit card debts. It does not make sense to invest money with a credit card debt. First lower your costly debt and then think about investment. Every dollar you save on credit card debt saves you >30% interest. It is of paramount important to settle high interest charging debts (like credit cards) before you start investing. If you have a lump sum money in your saving and you are confused whether to pay credit card debt or invest this money, choose credit card. No investment option will give you as high returns of >30% per annum. But by paying your credit card debt you are instantly reducing you >30% interest burden. Pay-off your costly debt before investing.
(5) Pay Yourself First
This is perhaps the most important investment basics for beginners concept after power of compounding. How can one be a successful investor? The answer is very simple, by controlling expenses, saving and then investing. Whether it’s spending on utility bills, groceries, vegetables, vacations, maintenence… every expense must be a planned expense.
Objective shall be to know exactly how your money is flowing and how much you can hold on as savings. Do this analysis on an excel sheet and finalize a savings target. Once you are aware of your savings potential pay yourself this money at the beginning of each month. After you have paid yourself then pay your other bills. We actually do the opposite, we fist spend and the remaining balance at the end of month we call it as saving. This is not good as per rule book of investment basics for beginners.
Care must be taken that you should neither be paying yourself too high nor too low. PAY YOURSELF figure shall be analyzed thoroughly and then finalized. Every month set aside a fixed amount of money (start a recurring deposit). If you want to pay all bills such as gas, electricity, telephone and insurance in starting of month, pay it but pay after you had paid yourself. I can tell you, this is the best investment basics for beginners advice that can be practiced in real life and see its benefits.
We recommend that you should start with paying yourself as low as saving 5% of your income. Depending on your lifestyle, standard of living and debts you can afford to increase this value till 25%. But try not to pay yourself less than 5%. Remember, the more you can save, the greater will be your fortune. A few dollars invested today will be worth much more in future. You will be surprised to realize that how easy it is to live even with few dollars less in your pocket. Probably you will never notice this deficit in your income. Instead in future, you will not have words to thank your-self for this wise decision of your that you made years back.
Investment roadblocks one should avoid
Before you proceed to start your investment journey and begin implementing the investment basics for beginners guide, you must be aware of some roadblocks . These road blocks had been faced by majority of beginners when they started investing.
Reasons for not investing
There is no guarantee about how stock market is going to behave the next day. Stock market volatility is completely unpredictable. But one thing is guaranteed that this uncertainty shall not stop us from making investment. Investment is like our life, it shall continue its progress no matter how bad the circumstances are. Investment basics for beginners guide helps you to take advantage of compounding without worrying about market volatility.
Delay investing
Investment postponement is the dumbest thing you can do for your financial independence. You already know that the earlier you start, the greater will be your accumulated capital. If you are already well past 20’s, then we can only give an advice to Start now!
Costly Debts
We have already discussed in our investment basics for beginners guide that costly debts shall be paid-off first before investing. After you have paid off your debt you can start investing. But it is equally important that one shall take care not to accumulate such costlier debt again. Debt like credit card and personal loans must be avoided in all circumstances.
Choosing long term investment vehicle for short term goals
People often are not clear on the difference between long term and short term investment options. Untrained investors often invests in stocks for short term gains which is a big mistake. One should invest that money in stocks that will not be needed for at least 5/6 years in future. Sorry I missed to include this point in my investment basics for beginners guide, but this distinction is important.
Avoiding stocks as it is risky
We have already said in our investment basics for beginners guide that few percentage point changes has a big influence on compounding power. It is true that in short term stocks are risky, but they are reasonably predictable in long term. If you’re young, you should invest most of your money in stocks (but for long term holding like 10 years). Being young, gives you the opportunity to stay invested for longer time. In long time horizons returns from stocks are the best.
By doing nothing you can earn you more in stocks
The best stock investing strategy is to buy your stock and sleep for long term. Choose your stock carefully and once your have done that do get bothered by market volatility. Frequent buying and selling of stocks imposes high transaction rates which greatly diminishes your profitability. Actually by doing nothing you can earn more from stocks. Passive investing is a great investment basics for beginners advice.
Conclusion
The main lesson we learnt from this article on investment basics for beginners in this, power of compound interest. Start investing in stocks very early in your life. Remember that it is still not too late, doing something is better than doing nothing. Another lesson learnt is start paying yourself first. Start the process of automatic investment. Do not hold on to expensive debts, pay them first before you start investing.
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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.
this was the best article i have ever read, really written in simple yet effective manner.
I must say very useful article for new investors in India. A must share article. Thanks for sharing.
WOW, I have been trying to get the basics and this is the best. Thanks a million for this.
Wish I have got it earlier.
I am 22 years old. After reading this article today, I feel that I have taken the right decision to invest in stocks (a week ago). From now, I’ll pay myself, I’ll save, I’ll invest, and I will be financially independent! Thanks to the author. This is the best which a beginner can ever start with.
Many thanks for the appreciation
Mani, Your information is very good and easy to understand. Wish I had read it much earlier
Thanks for your appreciation. It means a lot…
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I want to know how can i convert capital gain income in to tax free income which is the various scheme and plan where i invest money and also part of income get monthly
Please visit this link.
It can give you more clarity on how to save capital gain tax.
http://www.getmoneyrich.com/real-estate-investment-best/