What are the basics of investment?
Are you interested in starting your investment journey and taking charge of building your wealth? It may seem confusing at first, but you don’t have to worry. We have the perfect guide to get you started on the basics of investments. You will learn about asset allocation, risk tolerance, and investment vehicles, which are essential for building a successful investment portfolio. We will break down these basics in simple terms so you can make smart investment choices.
Build wealth
Why let your money sit idle when you can make smart investments and multiply your wealth? This is one of the basics of investment. Investing can seem risky, but we will discuss safer options to begin your journey. As you move forward with your portfolio, you will need to make more risk-appropriated decisions to make profits and get the right results.
The power of compounding
Compounding, in simple terms, is making money from your money. It is a powerful tool that enables you to reinvest the returns as an investment and earn from that, too. This is mostly a long-term investment, as the cycle continues until you make and withdraw profits from the reinvested wealth.
For example, if you receive interest payments from a fixed deposit, you can use that money to invest in a mutual fund via a monthly SIP. This way, you can generate long-term gains from the fixed deposit and the mutual fund. However, you must only apply the fundamentals of compounding once you have successfully understood the basics of investments.
Fixed deposits
If you are looking for a safe investment option, a fixed deposit is the way to go. This is a low-risk option where you simply put away a certain amount of money for a given period and receive interest from the financial institution of about 5-7% p.a., depending on the current interest rates. Keep in mind that you cannot redeem early without losing out on returns.
This form of investment is perfect for people just getting acquainted with the basics of investments who do not wish to keep their wealth idle and do not want to take any risks or create a portfolio with their diverse investments. They simply want to keep their wealth in FD and let it generate returns without withdrawing it for a few years. Owing to inflation, the returns here might not seem enough. It is best to explore more revenue-generating options, which are highlighted below.
Gold and digital gold
Investing in physical gold can be risky, which is why digital gold has become popular. Digital gold is a safe and secure form of investment where you can invest as much as you want efficiently and transparently without paying any making charges for the gold. However, returns are not regular, and there might be risks involved with the value of gold in the future.
Sovereign gold bond
Sovereign gold bonds are backed by the government, making them safe substitutes for physical gold as investments. They are government securities designated in grams of gold. You can redeem the matured amount after eight years and partially after five years of investing. Bonds can be transferred or traded in exchanges and held in demat form. Returns are based on the accelerations in the value of gold as well as interest incurred on the investment.
Bonds and debentures
Companies issue bonds and debentures for the public to invest in for their funding, and this is called debt financing. Bonds and debentures are types of loans on a company for a fixed period incurring a fixed interest rate. Bonds are secured loans, while debentures can be unsecured. The interest rate is high, but collateral isn't required.
Also read: Types of bonds
Mutual funds
Lastly, a mutual fund is a type of investment that pools wealth from multiple investors to buy securities. These funds include securities, bonds, and stocks and are managed by fund managers. If you are looking for a popular investment option, mutual funds may be the way to go, as they are integral while learning the basics of investments.
How do mutual funds work?
Mutual funds are an investment option that allows investors to pool their money together to buy shares of a company. The funds are managed by a company, and investors are given units in the fund. This means that investors can become shareholders of a company without having to make direct investments.
To invest in mutual funds, one needs to choose a fund that aligns with their investment goals. The fund manager will provide information about the fund's management and other important details to help investors make informed decisions.
Example
Let us say a company launches a mutual fund that invests in small and big companies (multi-cap fund). People can now invest in the said mutual fund and gain units in the overall pool. The company shall inform the users about the management, experts involved, and other helpful information about the fund to give full disclosure so people can trust the company or manager.
Do note that you can sell your units whenever you want, but you must check the lock-in period and other regulations before doing so.
Also read: Trading psychology
Direct equity
Direct equity refers to investing directly in the stock market. This is a high-risk option but can yield high returns. Investors need to research well and make informed decisions while managing their portfolios.
Real estate
Real estate is another popular investment option. It requires extensive planning and high investment costs. If managed well, real estate can be a valuable asset; however, depending on multiple factors affecting the property, it can also become a liability for many.
Conclusion
It is important to explore all investment options carefully, thoroughly research, do your due diligence, and choose the option that best suits your financial goals. But before you do the same, invest your time in understanding the basics of investments and then move forward with your investments.
