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Investment Basics

What are Investments Basics?

The world of finance can be complicated and quite intimidating at times. We believe investments, as a practice is inherently simple, once you understand some of the major concepts and the lingo associated with them. In this section we endeavour to educate current or potential investors on the practice of investing from the ground up.

  • What Investing means?
  • Why to look at investment seriously?
  • Knowing yourself is equally important in investing
  • Various Investment types

What Investing means?

Investing means Putting your money to work for you...

In your Job or business , you can only work for some stipulated time period ie. say 8 -10 Hrs or at max 12 hrs a day. Moreover you will require holiday breaks and weekends where if you in business you don't earn anything on that day. But if you have put your money to work at right place , it will work for you 24*7, 365 days . Even on holiday's it will give you returns on your investments made.

Hence it is very important to know the concept of Investing .

As explained in the section of financial concept, there are different ways of making investments which includes putting money into stocks, bonds , MF , Real estate , gold etc. The goal of any person is always to put your money to work so that it earns additional profits.

Investing Vs Speculating.

There is a thin line between investing and speculating which investor should understand. Irony of Indian investors mindset is that they invest short term money into stock markets ( friends advice or hot tips in the market) so that they can earn quick money on that without understanding the risk associated with it and they feel it is called investments but in reality they are speculating in the markets. History says that none of the speculators have created the real wealth , its only the long term real investors who earn in the equity markets . Same is true for all asset class .

Real Investors are those who doesnot simply put money based on hot tips or at any random investment. He does thorough analysis and research before committing any capital to that particular asset. Though there still remains some risk and has no guarantee to success but still its better then speculating.

Why to look at investment seriously?

As discussed in the financial concept segment, investing though is simple to understand but difficult to execute and obviously in order to earn more money , you have to take it seriously.

With lifestyle expenses going up day by day along with inflation it has became a necessary to take some efforts in order to have money work for you so that one can retire peacefully and maintain the same standard of living..

One needs to understand the magic of compounding and take maximum benefit of the same.

Compound Interest

Albert Einstein once said that compound interest is "the greatest mathematical discovery of all time and is the 8th wonder of the world."

Compounding works on 2 principle's:

1). Reinvestment of the earnings

2). Longer the time horizon, better the compounding.

For example:

Say Current Age of Mr ABC’s is: 30 years and if he invests Rs. 10 Lacs today:

  • at 6% money gets doubled every 12 years , He will get Approx. 60 lacs at the age of 60
  • at 8% money gets doubled every 9 years , He will get Approx. 1.06 Crs at the age of 60
  • at 12% it doubles every 6 years , He will get Approx. 3.2 Crs at the age of 60

It took 24 years to reach at the level of 1.6 Crs at 12% interest but in last 6 years another 1.6 crs where generated. This is the beauty of Compounding .

To know more on concept of compounding plz contact us at K K Credible Financial Services.

Knowing yourself is equally important in investing

Even though everybody who is trying to make money is called investor, but does all investors think in same manner - answer to this is a BIG NO. They all come from different background, they have different time horizon, their goals are different, their emotional quotient is different and hence knowing yourself as an investor is very important. One needs to ask few questions before investing in any asset class. Out of many here are the few questions based on the which one needs to take investment decision i.e.

  • What is your Investment objective
  • What is the time Frame you looking at
  • Does this asset suits your Personality as in emotional quotient.

What is your Investment Objectives?

Mostly, investors have a some basic objectives like capital appreciation, safety of money. These objectives depend on a person's age, stage/position in life, and personal circumstances. A retired old widow will have different objective on investments compared to a 25 year old just starting his job. For old widow - safety of money with some growth in funds is the main objective while for a 25 year old who has entire life ahead will be more risk taker.

What is the Time frame one is looking for?

Generally it is said that shorter the time frame, more conservative one should be. ie if you know that you will require money after 6 months than one should park funds either in short term funds / FD or liquid funds but never in equities or real estate. For the objective like retirement planning / children's education - marriage which is some 5 -10 years ahead, one can look at more risky assets like equity Mutual funds or Real estate

Power of Compounding works best when time is on your side i.e. younger you start investing , better it is for compounding

Does the asset suits your Personality or emotional quotient?

Peter Lynch, one of the greatest investors of all time, has said that the "key organ for investing is the stomach, not the brain."

In other words, one needs to know how much risk or volatility he / she can take while making investments. Say for example , if you invested 10 lacs of Rs into equity mutual funds today and suppose if markets go down and your valuation becomes 9 lacs and still if you can sleep peacefully in the night or your blood pressure remains normal then equity Mutual funds are asset class for you but if you start getting sleepless nights then you should never invest in such asset class.

In order to know your risk profile contact us and we will provide you the complete details on your risk appetite