How to invest? - The basics!

Before we get into specific things that you should invest in, let us take a look at the general procedure of investing. How you should view investments, what are “risk-profiles” etc. These are the basic concepts of investing that will guide you though all your investments.

Step I: Setting Investment Objectives!

As we mentioned earlier, there are many reasons why you should invest. Some of them are “short” or “medium-term” things like the “big buys” that you want to make. Some of them are more “long-term” like “you want to retire at 45” or “you want to become a crorepati at 45” etc. Setting the objectives for an investment before making a particular investment is the first step!

Just to give you an idea, let us take an example. Suppose there is a Mr.Raju and he wants to take his wife for a trip 5 years from now. Now, Mr.Raju has a elaborate trip planned for his wife. He calculated his expenses and it has come to Rs.400,000. Raju is wise and he knows all the bad effects of taking a loan from the bank so he has decided to invest some money every month so that 5 years from now he has Rs.400,000 in hand.

This is Raju’s investment objective. This is what Raju keeps in mind while investing. So Raju finally does the required calculations and figures out that: If he invests only Rs.6,800 every month then after five years, if the money grows at 15% then he will have Rs.587,000. Raju thinks that this is perfect since he can afford to invest Rs.6800 each month.

This is how investments are done. Before you make any investment, you must first decide “why are you making that particular investment?”. Then you will know how much money you need to accumulate and in how much time. Once this is known, you can calculate backwards and you will know how much you need to invest each month to reach your aim.

Don’t just make random investments. This generally gives you the feeling that you are investing a lot but later on you will realize that it was not much since you invested in an unorganized manner! Before making any investment, decide your investment objective. This means that you have to basically decide two things:

1. How much money you want to accumulate?
2. In how much time?

Step 2: What is your “risk-profile”?

In investments there is a relationship between “risks” and “returns”. The higher the risks the higher the returns. The lower the risks the lower the returns. There are some investments you can make which will “double” your money within a very short time. However, these investments are really “dicy” or “risky”. If they do not go as planned, you may end up losing the money you invested.

For example, a friend of yours comes to you and says, “I have a great business plan! I want Rs.40,000 from you and within 6 months I will give you Rs.80,000! Please help me out…” This might work, or it might fail badly. The risk involved is high. However, the return of the investment is also quite high! A 100% rate of return in 6 months!

There are other investments that are very secure. They have very little or no risk involved in them. For example, if you invest your money in a bank that offers a 6% interest rate, then irrespective of what happens, your money will grow at the small rate of 6% each year.

So, basically, before you invest, you first need to check out what is the risk associated with the investment. Is it a risky investment? Can you end up losing all the money you invested? Or is a safe or “sure-shot” investment?

Then you need to see your situation and your “investment objectives”! Can you handle the risk of the investment? Is it crucial that the investment pays off for your objectives to be accomplished? Is the time in which your objective must completed so low that you NEED to take up a risky investment with high returns?

Think wisely about this and your situation and your objectives! If you do not, you may end up losing a lot of money! Think practically and realistically! We are not able to give you more practical information about this because everyone has a different situation and different objectives and can take up a different amounts of risk.

Generally young people can take up more risk. They have time on their side! Even if something bad happens and the risk causes them to loose some money, they can always recover it since they are young. Since young people can take more risks, they can enjoy higher returns also. One more benefit of investing when you are young!

Older people cannot take up so much risk! They do not have time on their hands. If they loose too much money, they do not have that much earning power and they may never recover from the loss.

Next, when we talk about all the possible ways in which you can invest your money, we will also talk about the risk and returns involved in each kind of investment!