Wednesday, July 6, 2011

Basic Rules While Investing...

We all know why one should invest at a regular interval.. it should be like a compulsion investments which could help us in future. No investment mode is bad..right from old timers FD, PPF, RDs, Insurance etc to the new genx modes of Stocks, Mutual funds etc..

The most important thing for anyone is to know how much he has to invest and how he would divide the amount set aside wisely. It’s always better to break up the amount and split them in to various modes, keeping in mind the Tax saving too.

Safe investments are FDs, PPF, RDs, Debt funds etc where in we know for sure the principal amount would always be intact…while entering in to Stocks and MFs etc one can never be assured returns. Of course this is very debatable as both the modes have their own pros and cons. Like the earlier ones might give you less returns but guaranty principal amount protection where as the later one could give very good returns  but one cant be too sure about the same.

In the investment world the race between the hare and the tortoise is often won by the tortoise.

As long as we invest regularly one needs to understand the basic rules while investing no matter in which product it is …

-          Clear cut investment objectives and a Realistic plan to get there:

Pen down all your near term and long term requirements i.e. buying a house, car, marriage, education, kid’s education and so on…  Mark down which are the most important ones and how much would you require in approx. Prioritizing will help you set your goals easily. Make a realistic plan to achieve the same goals.

-          Diversify:

It’s very important to diversify your investments. You could invest in high risk modes such as Stocks, Mfs and part in to safe ones too. It has to be spread among several investment types to protect your asset.

-           Risk tolerance:

Know your risk appetite…If you have a good risk appetite  Stocks, Mfs are very good options for you, where as if it’s the other way around you should keep a track that you invest more in to safe products and less in stocks.

-          Power of compounding:

If you start investing small amounts at a very young age then for sure you have the power of compounding in your hands. No matter how small the amount is, important would be that you continue and not stop investing that small amount on a regular basis.

-          Carefully select the best:

If any product confuses you a bit, then best is to try and avoid the same. Selecting the best is very important as after all it’s your money. The sales person has his job of selling any product to you, but it’s up to you to understand and then decide. Do not invest in stocks which are least traded or just because someone told you that the stock would go up to x price. Understand the company / product and then make a choice.

-          Greed:

Don’t be greedy, that’s a thumb rule one needs to follow. Always study, understand, gauge the risk factor involved and invest smartly. No one can become a millionaire over night. So have patience and think wise. Don’t blindly follow any reports, or investment decision of others. Make your own choice, it’s your money…

Remember nothing is enough!!! We all want to earn big bucks and be a millionaire. A control over greed, understanding the risk and the product well is a must. There is a conversation between Bud and Gekko from the movie Wall Street (1987), its one of my favorite conversations…

Bud: How much is enough, Gordon? When does it all end, huh? How many yachts can you water-ski behind? How much is enough, huh?

Gekko: It's not a question of enough, pal. It's a Zero Sum game – somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred – from one perception to another. Like magic. This painting here? I bought it ten years ago for sixty thousand dollars. I could sell it today for six hundred. The illusion has become real, and the more real it becomes, the more desperately they want it. Capitalism at its finest.

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