Investing 101
What is investing?
Investing is an opportunity which increase your financial worth and assets. It simply means putting your savings into an asset class (or different assets classes) with expectations to earn profit or value growth. It’s a way to make your money work for you to secure future financially.
Why investing is necessary?
Investing helps to secure your future financially. It is also necessary for are few other reasons like happy retirement life, to reduce tax burden, earn passive income, to enjoy extra earnings etc.
Investing & Risk:
In finance, risk can be defined as ‘Probability of losses’. In simple words, risk is nothing but the level of uncertainty of earning profit from an investments.
Risk is inherent for investing and there is no risk-free investment. Therefore, every investment and Asset Class carry certain kind of risk. For example, equity investments carries market risk while debt instruments comes with risk of interest rate.
Understanding different asset classes:
There are 3 main asset classes
- Equity
- Debt &
- Cash or cash equivalents
Other asset types include real estate, gold & precious metal, commodity and cryptocurrency. Each asset class has its own merits and de-merits. And choosing an asset class for investment depends mainly on factors like investor’s goal, risk capacity, returns expectations and time horizon. Investing in a mix of asset classes helps to diversify and lower down the risk. Therefore, Diversification is important to keep the required balance.
What is Diversification?
Diversification simply can be defined as ‘A technique used to reduce the risk by investing in variety of investment types in a portfolio’. In simple words, diversifying is nothing but to spread your investment over different asset classes. Diversification helps in offsetting losses of some investments with gains of others in the portfolio. Right diversification can protect a portfolio against risk in the long term.
How to start investing?
This is one of the frequently asked question.: How o i start investment? Starting investment is easy if you understand basics and your investor profile. Investor profile means to understand following factors as an investor:
- -Investment goal
- -Duration of investment
- -Risk ability
- -Amount of investment
- -Mode of investment (lump-sum or regular)
- -Taxation
- -Liquidity needs
- -Other financial requirements
Above factors will not only help you in choosing suitable investment option for you but also keep you on right track to achieve your goals.
Before starting an investment make sure that you have:
- An emergency fund up to 6 months of living expenses.
- Have taken adequate term and health insurance.
- Low and manageable debt/credit.
Investing is actually simple, but people make it quite complicated to understand by choosing wrong product or investing without any goal. All you need is basic knowledge, product understanding and patience to hold for long term.
Happy Investing!
