Investing for the first time? Know what various asset classes can do

Before proceeding with your investment journey, identify the requirements or goals for which you will use your investments.

Once you start generating income, the next step is to start saving. However, saving money alone is not enough to take you through towards achieving your long-term financial goals. This is where the concept of investing comes in, where you methodically set financial goals, diversify among asset classes, regularly channelise your savings in them and stay put in a disciplined manner. This article explains how beginners can start investing to achieve their financial objectives or simply grow their wealth.

 

Why should you invest?

Investing is the way in which you plan and put a part of your money that remains after monthly expenses into asset classes such as stocks, Fixed deposits (FDs), gold or property, etc. that will grow over a period of time. You should invest because:

 

• Inflation is real, and so are the costs of living. By investing your money, you are building a financially secure future that will help handle these costs.
• To attain financial security. Building a house, funding your child’s education and planning your retirement can be well handled if you start investing early.
• Meeting your aspirations. You do not want to be left out as the overall lifestyle of people around you improves over time.
• Your needs may grow as your family becomes bigger.
• To harness the power of compounding. Your investments earn returns and those returns also fetch further returns and this process compounds over time.

 

Saving vs investing: what should be done when?

Saving is a low-risk and low-returns option in which you may get ready access to your money. This helps in case of short-term requirements. On the other hand, investing comes with some risk and the returns are also comparatively better. Remember, most of these risks reduce as you invest for longer. It is also a good idea to start investing for your emergency fund as soon as possible. 

Investment options for beginners

There are a variety of asset classes in which one can invest.

• Stocks: Historically, they have delivered higher returns than most asset classes but they can be volatile in the short term.
• Real estate: Also grows over time in value but can be illiquid.
• Gold: This asset class has also delivered good returns but remember, buying jewellery may involve costs like making charges.
• Fixed deposits and bonds: They are relatively safer but tend to deliver lower returns.
• Public Provident Fund: Highly safe but return profile is lower than stocks.
• National Pension System: You choose the proportion between stocks and bonds, can be tax efficient, but liquidity can be low. 

The most important aspect of diversifying among various asset classes is that each of them are likely to perform differently across different time frames. As they say, asset allocation is the most important step and is the starting point of investing.

 

Mutual funds

Investing in stocks and bonds can be difficult even for experts. As a beginner, it may be ideal to start investing in mutual funds as they offer easy convenience, diversification, professional management, transparency and a well-regulated framework. It is also ideal to start with a Systematic Investment Plan (SIP) that lets you invest a particular sum of money periodically in a disciplined manner. Mutual funds can also be tax efficient as the buying and selling by the fund manager within the fund are not subjected to tax.

 

What should a beginner be aware of before investing?

Before proceeding with your investment journey

• Identify your requirements or goals for which you would be using your investments.
• Be aware of the risks involved. Remember, often market risks reduce as your investment horizon increases.
• Register with the official platform and track your investments. Invest your money only through regulated entities. A beginner-friendly way to start with investing is to start SIP where you can invest as low as Rs 100 regularly.
• Before investing, one should be aware of lock ins, if any.

 

Investing paves the path for financial independence and security and the  three basic mantras of investing are start early, invest regularly and stay invested for the long term.

 

FAQs

When should you start investing?

You can start investing as soon as possible. The younger you are, the more long-term you can invest your money for and this will better help in achieving your financial goals.

 

What are the points to consider before investing in a financial product?

Before investing in a product evaluate how safe the product is and only then proceed with the investment.

 

Will there be a change in returns if I withdraw investment before the term ends?

If an investment is withdrawn before the lock-in period, the investor may have to pay the penalty that may impact the returns.