There are two truths we’d like to stress to you at this point.

One is the fact that taking the time to acquire even a very rudimentary knowledge of investing, whether at 21 or at 60, will put you well ahead of your peers in terms of Financial Success.

The second truth comes from one of the richest person and renowned investor, The Warren Buffett, “If you don’t find way to make money while you sleep, you will work until you die”.

And that’s all investing is: Putting your money to work for you making more money. This is known as “Passive Income”.

Basic’s
Building blocks of investing for beginner’s is “Asset Class”. There are endless list of specific investments you can make, but nearly all investments fall into one or the other of a handful of categories commonly referred to as “Asset Class”.

1. Equities / Stocks.
2. Fixed Income / Bonds.
3. Cash and Cash Equivalent.

Principle of Investing for Beginners – Risk & Return

1. Risk and Return go hand in hand. They increase or decrease in conjunction with each other. Investments that offer lower potential Return on Investment (ROI) typically offer greater security, less risk & Vice-versa. Because of the correlation between risk and potential return, investors need to carefully consider their risk tolerance when selecting investments i.e. how much risk you’re willing to accept or are capable to take depending upon your appetitein return for the opportunity to realize,  “X” amount of profit.

   For example,

   1. Equity Mutual Fund can deliver 10 – 12% Annualized Return over Long Term (7 yrs +) were as Public Sector Bank’s (State Bank of India) in current scenario returns 6.5 to 7.5 % Annualized Return on its Fixed Deposits (Term Deposits). Hence Public Sector Bank Fixed Deposits are less risky than Equity Mutual Funds and hence used to park Short Term Money.
   2. Term Deposits (Fixed Deposits) in Public Sector Bank’s gives 6.5% to 7.5% Annualized Return were as Co-Operative Societies / Bank’s gives 9.0% to 10% Annualized Return. Hence Public Sector Bank’s are less risky than Co-operative Societies.

Principle of Investing for Beginners – Invest Regularly

Most of us fail to realize how quickly we can develop a sizeable investment account simply by making modest but regular investments. It’s the magic of compounding that performs this trick. Here’s an illustration of Compounding at work;

Assume you want to accumulate a little over Rs 10 Lakh, 10 yrs from now, you need to open an investment account giving 10% Annualized Return and deposit Rs 4 Lakh now to get Rs 10 Lakh, 10 yrs from now. Suppose you don’t have Rs 4 Lakh today, what are you going to do? It’s simple, start a modest monthly deposit ofRs 5000/- for next 10 yrs, in the same Investment Account giving 10% Annualized Return and you have achieved your Goal of Accumulating Rs 10 Lakh, 10 yrs from now. The key to this is “Invest Regularly” to reach your goal.

Principle of Investing for Beginners – Cost of Delay

When we start earning, the last thing on our mind is planning finances and preparing for the future. We are excited to finally earn our own paycheck and find multiple ways to splurge our money. As we grow older and the need to take on more responsibilities increase, we begin to broaden our horizons and plan better. But what we may not realise is that we will never get back the time we have lost. In the investment world, time is as important as money. In fact, time creates money.

Let’s use an example to illustrate just how advantageous it is to harness this power of time. If you invest Rs 10,000 in a monthly investment Account at an annualized rate of 10%, in 10 years from now you can accumulate Rs 20,14,576/-. Delaying it by days, months and/or years could cost you a lot.If you delay your monthly investment by 1 year, you will accumulate Rs 17,16,519/-. A delay of 1 yr costed you Rs 2,98,057/-. A delay of 2 yrs will cost you Rs 5,69,018/-. The cost of delaying investment decisions by even a month would encourage any investor to not waste a single minute. So why do we procrastinate with our investment decisions, when we stand to lose so much? We do not truly understand the power of compounding up until we experience it and by then it is too late to capture lost time.

Principle of Investing for Beginners – Goal Based Approach

Goals-based investing is an approach which aims to help people meet their personal and lifestyle goals, whatever they may be, in a straightforward and simple way. It does this by placing people’s goals right at the centre of the decision-making process and aims to build investment solutions that meet the requirement.

Some of us may have goals such as having a dream house, going on a holiday, ensuring they have enough income to live off in retirement and ensuring their money grows so that they can afford to take regular holidays in retirement. Alternatively, they might like to do all of that and also leave some money for their children or grandchildren.Just as you may have different bank accounts for different purposes such as a savings account or a fixed deposit account, it makes sense that you may be invested in different investments aimed at meeting different goals.

Once your goals are identified you can then look to investment solutions that are targeted at meeting those goals.A goals-based approach to investing is beneficial to you because it puts you in the driver’s seat and you are actively involved in the decision-making process. The success of a goals-based strategy is not about outperforming benchmarks or competitors. Success is measured by how well yourportfolio is tracking against a stated goal. It’s about being more relevant to your needs, not only in terms of product design but in terms of communications and reporting.By focusing on how an investment is on track to meet your needs, it should help you fight the urge to respond inappropriately and irrationally when markets aren’t performing as you might expect.

We at Hari G Kamat’s Investment Avenue follow a bucket approach, divide life goals in 3 broad categories;

1. Essential Needs – Covering everyday living expenses such as food, shelter, clothes etc.
2. Lifestyle Wants – Covering holidays, a new car, and luxury items that are not essential.
3. Legacy Aspirations – Covering the desire to leave something behind for children, grand children’s & charity.