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“Never depend on single income. Make investment to create a second source.” – Warren Buffet

Investment is an asset or item that is purchased with the hope that it will generate income or appreciate in future. So, invest your money because you’re going to need much more than you think.

When to invest:

It’s not your salary that makes you rich; it’s your spending habits. Wise spending is part of wise investing. It’s never too late or too early to start. The 4 keys that could guide you regarding when to invest are:

  1. Start investing early- Start early and retire rich.
  2. Invest regularly- Invest regularly and methodically and let the magic of compounding work for you.
  3. Never time the market- Be a smart investor. Always invest in time but never try to time the market.
  4. Be patient- The longer the investment horizon, the lesser is the risk and greater are the returns.

In investing money, the amount of interest you want, should depend on whether you want to eat well or sleep well. Your financial circumstances will change over time, but you can alter how you invest to suit your needs. Whether that is investing a lump sum as and when you have built up a reserve of savings or by investing a smaller amount in a monthly savings plan; if you have the money available, you could start straight away – the sooner you invest, the longer time it has to grow.

Seeing is believing, here’s an example –

Starting Age of investment 25 years 30 years
Monthly Contribution 10,000 10,000
No of years for investment 35 30
Total Contribution 4,200,000 3,600,000
Rate of Returns 12% 12%
Value at maturity 64,309,595 34,949,641

If we look at the above calculation, we can easily make out that the contribution of Rs. 6 lakh done in first five years actually gives boost to your overall wealth. The difference of wealth creation is close to 46%.

10 steps to choosing the best investment

When it comes to choosing what investment to go for, a one-size-fits-all approach just doesn’t work.

  1. Investing money – how much do you have to invest?
    Are you looking to invest a lump sum, or to set aside a regular monthly amount?
  2. How long do you want to invest money for?
    Or, put another way – when will you need access to your money? Certain investment products run for a fixed period of time, so if you have a specific date in mind as to when you need access to your capital, then some product types won’t be right for you.
  3. What are you planning to use the money for?
    We all have different reasons for saving, and the purpose of your investment can affect how much risk you’re prepared to take with your money. If your investment is to pay for your children’s education, then you may be investing over a long period of time, and looking for a higher return, as a result you may be inclined to choose a higher-risk investment option.Conversely, if you’re investing money to pay for an overseas trip, or a new car, you may be investing for a short period of time and want certainty about the outcome of your investment, and you may feel more comfortable with lower risk short term investments.
  4. Do you need an income from your investment?
    If you’re looking for a regular income from your investment then this will influence your choice of product. A pension is probably the best-known investment vehicle for providing an income post retirement.
  5. What age are you?
    Attitude to risk can change with age. Longer term, higher risk investment options may be more attractive to someone in their thirties than to someone who is getting close to retirement.
  6. What are your personal circumstances?
    If you’re a parent with financially dependent children, then you’re probably going to be more cautious with your savings than someone who’s single and doesn’t have any dependants, and therefore more likely to choose a low to medium risk and possibly short term investment.
  7. Do you have other investments?
    If you already have a number of investments and feel that your future financial requirements are well taken care of, then you may be willing to take a higher risk with your next investment.
  8. What are your values?
    It’s important that you feel comfortable with where your money is going, so if you have strong beliefs then it’s worth seeking out an investment that fits with these.
  9. What’s your risk profile?
    Not everyone is happy riding out the ups and downs of the stock market, and if the thought of a particular investment makes you lie awake at night, then it’s probably too risky for you.
  10. How much flexibility do you need?
    When you invest money, it gets tied up and is no longer easily accessible. If you think that it may be an important factor for you then it’s worth knowing up front what the implication of getting out of an investment early is – if indeed it’s possible.

As a new investor, you should start contributing 10% – 20% of your salary towards savings. You can start with investment in mutual funds through Systematic Investment Plan (SIP) which allows you to invest into market with moderate amount of risk. Systematic and disciplined approach to investment can lead to wealth creation.

In the early stages of your career, you can also take high risk as there is no financial or social responsibility on you. You can take aggressive investment approach and start investing into some mid cap funds or equity shares also, however, indulge in them only if you have the required expertise.

You should also start accumulating some money for your immediate need or emergency needs. You should at least have 3 to 6 month salary as an emergency fund. Ideally you should park this money into Liquid funds which offer better returns than a savings bank account and you can also get the money immediately (i.e. within 1 or 2 days).

Key Takeaway:

Little drops of water fill the ocean. Your small monthly savings can help you to achieve your goal of wealth creation in big way.

Ankita Bonde
Ankita Bonde
Ankita is a tax advisor at H&R Block and a CA aspirant with a graduate degree in commerce. She is an expert in managing Income Tax Returns and has handled two tax seasons. Her major interest areas are individual taxation more specifically focussed at FBAR and Income Tabulation for US tax clients. Her hobbies are reading books, watching movies, drawing and painting.

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