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What is investing ?

Author:

sInvesting.

As far as an average Indian is concerned, Investing is an activity that became popular from the late 80’s. Before that, this was an activity that was confined to the rich and the business class. The main reason for this was that:

  • Common man did not have enough investable surpluses in those days.
  • There was lack of understanding about key concepts on wealth creation.

But now, the scenario has changed. The number of working population is high, the rates of pay are high, the taxation rates are low, investment opportunities are varied and knowledge about various investment options are freely available – all resulting in investing becoming a common activity among everyone.

Investing means growing your savings you already have. It’s about making your money work for you. When you invest, benefits can vary depending on the risk you take. There are short term and long term investments. Depending on the time you commit, funds will be locked. So, generally speaking, investing involves committing your money for some time – it could be 1 month or 1 year or 10 years. You have to wait for your rewards.

Investing should be done after evaluating the asset – Investing cannot be done in any asset without valuing it. Due to the interplay of demand/ supply forces , the offer price of assets like shares and real estate will be more/less than the real value it has. Investing in assets at high prices will not help you to grow your savings and hence, the real value of these assets will have to be found out by experts. A prudent Investor looking to grow his money will buy assets only when it’s sold at the correct value.

Investing should be done at the right time- starting an investing spree at the age of 45 will not work wonders for you. That’s because any investment needs time to grow. The right time to start investing for various financial goals is to start as early as possible.

It’s also about growing your money prudently – Money is a weapon that’s to be used very carefully and any reckless attempt to use it and make profits can backfire within no time resulting in a total ruin of your life. By being ‘prudent’ we mean, determining an action or a line of investing that’s practically wise, legal and careful. When you look around for opportunities to invest, it’s natural to stumble upon ideas like multi-level marketing of certain financial schemes or money chains etc that may seem to be too good an opportunity to make a quick buck. It’s important not get tempted by such investment offers. Any investing decision you take must be practical, legal, safe and capable of creating wealth for you in the long run.

Rewards from investments vary – Investments range from risky types like stocks to more solid ones like fixed deposits. Depending on the type of investment you’ve made you get returns in the form of rent, interest, dividends, premiums, pension benefits or appreciation in value. The more risk you take, the more you earn as rewards.

The risk of investments stems from the fact that all investment choices are made at a particular point of time, according to the preference of the investor at that point of time by considering the risk factors that’s known (or reasonably estimated) to them. However, the future is always uncertain. Preferences of the investors can change, their goals can change, their investing capacity can change, the overall economic scenario can change and the positive factors that attracted them to a particular type of investment can also change. So, investment will have to be reviewed from time to time in the light of new information, changed expectations and preferences.

The purpose of investing may be different for different people. Normally, a person would invest with one or many of the following objectives in mind – A Regular Income, Creation of wealth, Preserving your capital, Planning for retirement life, Education /marriage of his children or To start a business.

 You can invest in a wide variety of assets like shares, mutual funds, fixed deposits, post office savings and RD schemes, National saving certificates, insurance, chits, debentures, gold, real estate, other metals like silver and diamonds, art and antiques, copy rights and distribution rights etc. All assets do not exhibit growth every time. Hence, it is important to spread your money across many assets.

One golden rule of investing is that – risk (coping with the uncertainties) and rewards are directly related – higher the risk, higher the chance for rewards. We have explained the relation between risk and return in a separate post.

The process of investing.

The process of investing is quite simple-

Select the suitable type of investment – Depending upon the money you got, the risk you are willing to take and your life stage,   you will have to short list the type of asset suitable for investment. For example – for a person who is approaching retiremelong-termterm stock market investing may not b e a good choice.

Get the required knowledge – Next, you’ll have to assess yourself and find out how much knowledge you have in that particular asset category. This assessment will tell you where you stand right now, and the amount of preparatory work you need to do before investing your money in it.

Draw your plan and start executing – Once you gain enough knowledge, try to draw a plan to invest systematically – get access to the right information, plan properly and make the right choice. If you cannot draw down a plan, seek the help of financial advisors or investment consultants who can guide you in drawing a plan based on your preferences.

 

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