Investing can be intimidating and nerve racking. Combined with bad advice from friends and lack of knowledge, newbie investors can make all the wrong moves. Throw in a bit of emotion and you have a recipe for disaster.
Here is a guide to get started.
1) Have a goal in mind
Saving for the sake of saving is not a good idea. Saving with a goal in mind helps you stay committed and focused.
One of the most common mistakes made by rookie investors is to start investing in a haphazard manner without a plan in place. Are you planning an overseas holiday? Are you planning on getting married? Are you saving for the downpayment for a home? Then pen down how much that goal is going to cost you and start saving for it.
The actual investments you narrow down upon will depend on how quickly that goal is to be realized. If it is a couple of years away, you can try a large-cap oriented equity fund. If it is of a much closer time frame, you could try a debt fund or a fixed deposit.
2) Keep it simple
Where should you invest? A tough one.
There are different types of funds to pick from. Plenty of stocks to invest in. Fixed return and debt investments too. It can get confusing.
Keep it simple.
If this your first attempt at being an equity investor, avoid following the television for stock tips. Also avoid trying to time the market. You cannot.
Plunging into the stock market is not a smart move either. It would be better to select a good equity fund and invest systematically every month. If you are wary of a pure equity offering, then consider a good hybrid or balanced fund (aggressive). Such a fund will invest at least 65% of its assets in equity and the balance in debt.
Once you invest in equity, don’t let the ups and downs of the market sway you. In equity, volatility is a given. There will be periods when the market runs into rough weather and tests the resolve of investors. Don’t hit the panic button and discontinue your investments. Hold on.
3) Don’t hesitate to seek financial advice
Admit it, having an expert work for you where your finances are concerned ensures peace of mind. A good financial adviser should be able to explain to you your current financial situation and outlook in simple terms, help you identify your medium- and long-term goals, guide you through the process of selecting investment products that suit your needs, manage your expectations and help you prepare for different outcomes.
That does not mean you are absolved of your responsibility. But it does mean you have an experienced hand guiding you.
So even though mutual funds have direct plans which enable investors to directly invest in a fund, cheaper may not always be better. Read Should you invest directly or through a distributor?
4) Get insured
If you have parents dependent on you, or you are thinking of starting a family, then you should consider getting insured. The very purpose of life insurance is to secure your dependents in your absence. Start with a term plan.
Don’t ignore medical insurance even if your job provides you with a cover. Should you be between jobs or should you find yourself unemployed, you may also find yourself with no medical cover. Or, you may take up a job as a consultant and have no medical insurance provided by the company. Always have your own personal medical cover. A prolonged illness in the family can cause havoc with your savings.
5) Open a PPF account
The Public Provident Fund account offers investors tax benefits and the ability to build wealth. According to the latest Budget, account holders will be able to save up to Rs 1,50,000 every financial year under Section 80C. They get a tax deduction when investing in the account and the interest earned is tax free. On maturity, the entire amount is tax free.
The rate of interest, currently at 8.7% per annum, is compounded annually.
This is an excellent saving vehicle for the long term and young investors should open an account the moment they start earning. Even if they cannot afford to invest up to the limit of Rs 1.50 lakh, they should try to invest as much as possible above the minimum limit of Rs 500.