There is no hard and fast rule about when to start investing, but the sooner is always the better. Where and how to begin investing and what investment making company to begin with can be quite intimidating for first-timers to comprehend. It is important to understand the basics of investing before diving into which investment making company to consider.
Basic Investment Premises and Factors
Risk-Return Trade-off: Financial instruments differ in terms of their riskiness and potential returns. The popular belief is that there is a direct relation between risk and return .e. higher the risk, higher will be the return. Simply put, a riskier investment making company will yield higher potential returns.
Power of Compounding: The basic premise is that returns from investments grow exponentially as returns generated are re-invested, which enables one to earn interest on interest. In the long run, the power of compounding would allow the money parked in an Investment Making Company to earn much higher returns.
Age and Risk Appetite: Starting out early allows one to familiarize themselves with investment making company and also learn how investing works. When starting out young, one can afford to experiment and take greater. Age and risk appetite are correlated, as usually, youngsters have a higher risk appetite than those who are relatively older.
Investment objectives and strategy: It is better off to start investing earlier, but even much better to begin with specific goals in mind. Every investor has different characteristics in terms personal goals,and investment goals. Therefore, it is important that one ensures that their desired Investment Making Company is consistent with the specific goals.
Conditions to Fulfill before Beginning to Invest
There are two essential conditions that need to be fulfilled before beginning to park funds in investment making company.
Ensure freedom from debt: There are various kinds of debts that one takes on during their life course, such as education loan, home loan, car loan and credit card loan. The latter differs from the rest as it is revolving kind of debt. The rest of the loans are for longer periods and waiting until all of them are paid off might be too late. It is advisable to pay off high-interest debts and invest part of their subsequent paychecks, and utilize the returns generated towards repaying the debt.
Building an Emergency Fund: The purpose of this fund is to provide safety against unexpected circumstances or emergencies. There is no fixed amount that should be invested towards the emergency fund, as this depends on the individual’s lifestyle and spending patterns. It is recommended that the emergency fund should be equivalent to at least 3 months basic income.
Investment Tips and Avenues to Consider
Invest regularly with Discipline: An effective way to do this is through Systematic Investment Plan or SIP of a mutual fund investment making company. With this plan, one can invest small and affordable amounts periodically through periodic installments. It is also an effective tool for minimizing investment risk as one invests through both, market upswings and downturns, without the need to worry about market scenario. One can also consider investing in equity SIP, wherein they invest small sums periodically and purchases shares of stocks of their selected investment making company.
Invest by Diversifying: An effective risk mitigating strategy, diversification allows one to earn higher returns with relatively lower risks. One can achieve this by investing in an investment making company, such as a mutual fund or exchange-traded fund (ETF).
Invest in Non-Correlating Assets: When investing through an investment making company, such as a mutual fund, there is minimal unsystematic risk, but not a systematic risk. In order to minimize systematic (or market) risks, one should consider staying invested in non-correlating assets such as stocks, bonds, mutual funds, gold, commodities, and currencies. The reason for this is that non-correlating assets are affected differently by the same market change or scenario.
To conclude, starting out sooner allows one to experiment and get accustomed to investing. Secondly, the sooner one begins, the higher the accumulated funds during retirement due to compounding. When investing and selecting an investment making company, one should keep in mind their investment and personal goals, risk appetite and financial considerations.