Investing for starters
Not investing wisely is one of the most common regrets of most people in their late 30s or 40s. You will hear statements like, ten years ago Sensex was XX or a houses were cheap etc.
The main goal of investing is not to make a lot of money. It is to achieve “financial independence” when you are older.
Financial independence…
… is the point in life when you have enough to stop working just for the money. I.e., you could still work for pleasure but not be forced to work to pay the bills, EMIs or children’s fees.
To achieve this, you have to start investing early in life and have the discipline and focus on doing it in a sustained and continuous way.
Patience
Wealth creation like yoga or gym. It needs lifelong discipline and patience. It is similar to growing a plant. While you water the plans daily, you don’t expect it to give fruits in a day, week, or month.
Dont: Bank FDs / RD / LIC etc
Bank FDs yields are low, is taxed, and worse, it is a loss-making investment if you consider inflation.
While insurance is a must for all individuals, most insurance policies are mis-sold as “investment options”. It would help if you bought “term insurance” that covers your life but does not give any money back. Term insurance is cheap and does what it is supposed to do — i.e. insure life.
Dont: Real estate for investment
Unlike 10 years ago, today buying flat for investment is not a good idea because
- The rent vs EMI ratio is poor.
- Prices are not going up due to a lot of new schemes
- Difficult to buy and sell properties
Do: Mutual funds
Mutual funds are a simple and most attractive investment option. Reasons are simple:
- Good returns
- Easy to buy and sell
- Can start with low amounts
Choosing the right mutual fund
One of the reasons most people do not invest in stocks/MFs is that it is complicated. There are a lot of options and confusing.
There are two parts to being a good investor:
- Basics of investing
- Be an expert
While becoming an expert might need a lot of time and effort, everyone should learn the basics. This is the minimum you can do for your stable future.
Two of the popular mutual fund I recommend are:
- Parag Parikh Flexi Cap fund
- Nippon ETF Nifty Bees
All you need to do is start a monthly SIP in these two and not touch it for the next 10–15 years.
Do: Monthly SIPs
SIP means “Systematic Investment Plan” — i.e. you decide a monthly amount to invest, and it gets automatically deducted from your account.
Minimally you should invest 20%-30% of your salary in MF SIPs. It should be more when you are young and have no other responsibilities. Whenever you get salary hikes, increase the SIP amount to match the hike.
E.g. if your salary is 30K, create two SIPs of 3K each on the 1st of every month, and imagine your salary is 24K.
Dont: Buy direct stocks or IPO
Dont fall for the stupid ads on TV, like 5paise.com, which show investing in stocks is easy.
Do not buy direct stocks unless you have invested a lot of time learning about stock markets. Investing in stocks is not easy, and there are many things you need to know before buying a stock.
However, stocks are a fantastic thing to learn. But you should be ready to spend time reading & learning. Maybe 2–3 years after consistently investing in MFs, you can venture out to buying direct stocks.
Do: Control spending.
Spend less on material things like phones, cars, clothes, etc. Spend only when really needed. Do not use credit cards, EMIs, or loans.
Spending less than what you earn is the most important habit to build in life.
Dont: Be greedy. Have reasonable expectations
Most people think is to remember is that stocks are not an instant lottery. I.e. money should double within a month or 6 months.
You get ~6% in FD, and~8% is inflation. So a 12–15% annual return is reasonable — anything more is a bonus.
Summary
Investment is like managing health or career. There is no easy way to do it. It needs a lot of discipline and patience. However, when done right can lead to long-term benefits.
Zerodha has a free online varsity to learn the basics to advanced aspects of the stock market. Start with the basic courses.
