How to start investing? This is the main question of many. It is very easy. But it requires good discipline. In general, the financial management of a Malayali can be described as follows.
Income – Expense = Savings
If you make a small change in this, your financial situation will automatically improve.
Income – Savings = Expense
All those who have achieved lasting wealth have adopted this path. It is when we identify our own goals and set aside money for them that many people realize how much luxury there is in their lifestyle. We may not be able to eat out and shop every week. But we can achieve our goals.
Things a new investor should do in order
- Create an emergency fund .
- Ensure insurance security .
- Identify your goals . Calculate the amount you need to achieve them. Find out how much you need to invest now to reach your goals.
- Find the investment method that suits you.
- Start investing .
- Choose a financial advisor if necessary .
Emergency Fund
Everyone should have an emergency fund.
An emergency can strike at any time. In such a situation, selling investments for long-term goals will result in huge losses.
It is generally believed that one should always keep an emergency fund of six months’ worth of expenses. This emergency fund should be deposited in a bank as a fixed deposit or savings account.
Your loved ones should also know about this. Otherwise, sometimes our loved ones will not be able to use it when needed.
Insurance
Before you start investing, you should ensure insurance security. Otherwise, a sudden accident or illness can affect your savings. An investor needs three types of insurance.
1.Life Insurance – Term life insurance
You only need life insurance if you have dependents on your income.
Ten times the annual income + Amount for your goals + The amount to pay off your debt (loan amount).
We need life insurance for this amount . This is a large amount and we can only afford a term insurance policy. Stop paying the current cash back policies and convert them to paid-up.
2. Health Insurance
Take health insurance for sudden hospital expenses. In my opinion, take a family floater plan of up to 3 or 5 lakhs. In addition to that, take a top up policy of 20 lakhs. For more information, read the insurance section on the website.
In my opinion, you should buy external health insurance in addition to your job-based health insurance coverage, because if an accident occurs while you are changing jobs, you will not be covered.
3. Disability Income Insurance
This is an insurance policy that provides an alternative source of income in the event that you are unable to work due to an injury. Sometimes, this is available as part of health insurance.
Without such policy coverage, your loan payments and household expenses will be very difficult to meet while you are unable to go to work.
These insurance policies are mandatory. They are not savings. They are protection against a single emergency financially ruining you and your family.
Goals
All investments should be for some purpose. The purpose can be anything, for example, to build a house in 10 years, or for your children to study abroad, or for a foreign vacation in 3 years. Once you identify the purpose, you can quickly decide on the investment method and amount.
Let’s take the cost of building a house as an example:
If it costs Rs 20 lakh to build a house now, it could cost Rs 40 lakh in 10 years. Using the inflation rate, the future cost can be calculated without much error.
This amount should be our goal.
Investment methods
Before deciding on an investment option, you should learn about various investment options. However, here is a guideline.
If your goal is within 5 years, stocks, mutual funds , PPF , and real estate are not good options. In this case, something like bank deposits would be a better option.
If your goal is after 5 years, mutual funds are a good option.
PPF is very good if your goal is to save income tax .
These are just guidelines. Please read the articles on this website that discuss investments in detail before making your decision.
Once you’ve decided on an investment option, use the calculator below to find out how much money you need to invest to reach your goal.
Things to consider before starting a new investment
Risk of loss and potential for profit
Typically, returns from investments that are not likely to lose money will be low, such as bank deposits. However, returns from investments that are likely to lose money will be high, such as mutual funds and real estate investments.
There should be a possibility of getting a return according to the risk we take for an investment. In other words, if there is a possibility of losing the investment completely, the return from the investment should be limited to that. Before starting the investment, we should carefully consider how much loss is possible in this investment and whether we are willing to bear that loss.
Liquidity
Liquidity refers to how quickly an investment can be withdrawn or sold and converted into cash. For example, if the investment is a twenty-year cash-back insurance policy, it is very difficult to withdraw it before the maturity date. If it has not been paid for three years, then sometimes all the money is gone. Similarly, real estate investments are also difficult to sell and convert into cash quickly. However, bank deposits and mutual fund investments can be withdrawn quickly. If a fixed deposit is withdrawn from the bank too soon, there will be a loss of interest. Similarly, if a mutual fund has to be sold too soon, there may be a loss of some money depending on the level of the stock market. But we can withdraw both of these quickly and get our money out. A good portion of our investments should be in investments that can be withdrawn quickly.
Equally important is to know what the procedures are for stopping an investment. Most investments have a term of five, ten or twenty years. Sometimes our financial situation can change during this period. Because of this, we sometimes have to stop. When I bought a plan in the past, the agent came to me and took the signed papers, but when I stopped it, I had to send a registered post to Chennai. Once some investment plans are started, they cannot be stopped, and if you stop, the entire amount paid will be lost. You should ask about this at the time of starting the plan. Similarly, you should ask the company’s website or the application form of the policy to see if what the agent says is true.
Diversification
I have mentioned in another article the need to not look at all investments in the same way . If all the money we have in our hands is in the same type of investment, then if there is a loss, there is a high possibility of losing all the money together. Do not think that investments are diversified just because the company selling the investment has changed. Similarly, if you think that all your savings are lying in buying a land in Ernakulam and your next investment is buying a land in Thrissur, there will be no diversification in your investments. If you want diversification from real estate investments, you should invest in bank deposits , PPF or mutual funds .
Should you start investing or pay off debt?
Before investing, we should consider whether we should pay off any high-interest debts. If we have credit card debt or loans from loan sharks, we should pay them off before starting new investments. Similarly, a car loan is something that should be paid off quickly. If we invest, we will only benefit from the investment if we pay more than the interest we pay on the loan. When we borrow money from a loan shark at 30 percent interest, there is no point in investing in methods that give 8 percent returns.
Is the investment scheme a scam?
We should always be careful to ensure that the scheme we are going to invest in is not a scam or not. We should invest only if we are sure that the scheme is not a scam. If there is even a small doubt, we should not invest. Similarly, before buying any investment scheme sold by agents, we should go to the website of that company and read about the various aspects of that scheme. Similarly, we should buy and read the form for the scheme and a copy of the document that we get after investing in the scheme before investing. If you cannot read this yourself, you should ask someone else for their opinion instead of asking the agent to explain it to you.
Never forget one thing, the information we ask for before investing is only obtained from the company and the agency. Because it is their requirement to make us invest. Once invested, there is no possibility of getting any information. Therefore, it is better not to invest in a scheme where it is difficult to get information before investing. Once started, it will be very difficult to withdraw from it. I have been searching for information for two to three years about how much money I will get after the term ends if I stop paying for an insurance policy I took after three years. I have not received that information even from the office of the insurance company. Even the agent who is a family friend and the agent who is a sincere friend who knows us well, once they stop investing, they will share very little information.
There is an easy way to know if an investment is a scam or not. Any scheme that promises to give you an interest rate that is much higher than the bank interest rate is a scam. For example, if the bank interest rate is 8 percent, and a scheme promises to give you 15 percent interest every year, you can be sure that it is a scam. Are you saying that you will get higher returns than bank interest by investing in mutual funds? Mutual funds are not scams. What you need to pay special attention to is that mutual funds do not guarantee returns. They only say that there is a possibility of getting higher returns. Mutual fund investments are risky. That is why the returns are higher. Banks will give the maximum interest rate that can be guaranteed in a market through fixed deposits. It is certain that any income above that will be at risk.
Don’t start investing if you don’t understand how the scheme works.
You should know how an investment plan generates income with your money. This does not mean that you should know all the details about the internal workings of the company you are investing in. In general, we should know how the company generates income by investing our money. For example, if you invest in a mutual fund, the fund manager generates income by buying stocks and bonds in the stock market. He or she will have told you exactly what percentage of the total amount can be invested in stocks.
But even if you ask what is going on behind the scenes of some of the devices currently on the market, you cannot understand it. It is better not to invest money in such complicated investments. Similarly, before investing in new methods like Bitcoin, you should consider the possibility of losing all that money in your mind. Because most people do not know what Bitcoin is or why it is so expensive.
How to choose a financial advisor?
If you’re a regular reader of my articles, you already know that investing is complicated. Even if you’re a well-informed investor, sometimes you need a financial advisor. Many business owners who are great at making money sometimes hire an outside financial advisor when it comes to investing.
There are many reasons for this. You should always be careful with your investments. Sometimes you may need to sell quickly or invest more quickly. If you rush during this time, you will miss that opportunity.
Similarly, how to save on taxes is something that needs to be taken care of as tax laws change every year. Rather than wasting our time studying this, it is better to hire an advisor. That time can be used for many other things.
The vast majority of people are not well-informed about financial matters. Therefore, a financial advisor can go a long way in helping us achieve our goals. An advisor can help us ensure good insurance coverage and choose good policies.
Below are some things to consider when choosing a good financial advisor.
Do not allow anyone who works on a commission basis to become your financial advisor. Only those who charge a fixed fee should be hired as financial advisors. It is better if this is an hourly rate or a fixed amount per meeting. A person who charges a commission of this percentage of the premium or mutual fund SIP amount that we pay for a year will tell us to buy only those investment instruments that earn more commission. Otherwise, they will not care which investment is better for us. But no matter what policy or fund we buy, an advisor who charges a fixed fee will tell us to buy the fund that is more profitable for us. Because if we go to him next year, they will still get the fee. Then if they cheat us, they will be harmed. There is no benefit.
Your financial advisor should be someone who has a lot of experience in the field. Don’t entrust your family’s wealth to a 22-year-old college dropout. Even if the college you studied at is an IIT or IIM. In my opinion, life experience is a big factor in choosing investments. Don’t risk your life for a newbie to gain work experience. Big companies and chartered accountants (CAs) will give them internships under them to gain work experience. Don’t entrust someone who has no experience in saving and investing their own money to manage your wealth.
Things to avoid
We don’t have to participate in every big investment project we see to secure our financial position, but we should avoid making big mistakes.
None of the world’s greatest investors have ever taken advantage of every great investment opportunity that came their way. They have taken advantage of every opportunity very well. They have also avoided making big mistakes. Missing a big opportunity will not reduce our current wealth. Other opportunities will come our way. But a big mistake can put us in a debt trap that we can’t get out of.
