The money one earns is partly spent and partly saved to meet the future needs. Rather than keeping the savings idle one can use them to earn more returns than he can generate by keeping them with him. This is called as investment.
One needs to invest to:
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generate a specified sum of money for a specific goal in life
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make a provision for an uncertain future
The most important reason for a person to invest is to beat inflation. Inflation is the rate at which the cost of living increases. The cost of living is what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 7% inflation rate for the next 10 years, a Rs. 100 purchase today would cost Rs. 197 in 10 years. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 7%, then the investment will need to earn more than 7% to ensure it increases in value.
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three rules for all investors should be:
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Invest early
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Invest regularly
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Invest for long term and not short term
There are four main things you need to think about before you can decide how to invest your money:
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Liquidity needs
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Goals and Objectives
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Time Horizon
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Risk Profile
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Before making any investment, one must ensure to:
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Obtain written documents explaining the investment
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Read and understand such documents
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Verify the legitimacy of the investment
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Find out the costs and benefits associated with the investment
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Assess the risk-return profile of the investment
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Know the liquidity and safety aspects of the investment
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Ascertain if it is appropriate for your specific goals
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Compare these details with other investment opportunities available
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Deal only through an authorized intermediary
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Seek all clarifications about the intermediary and the investment
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Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.
One may invest in:
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Physical assets like real estate, gold/jewellery, commodities etc. and/or
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Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest (3%-4% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples of 1,000/-Maximum amount is Rs. 3, 00,000/- (if Single) or Rs. 6, 00,000/- (if held jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi10 annually or annually. They can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives
Growth Investing- The approach to investing which aims to invest in fast-growing companies which are rapidly increasing their turnover and profits, and where the expectation is to make money from a rising share price (rather than income).
Value Investing- The strategy of selecting stocks that trade for less than their intrinsic value is called as Value Investing. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated
Bull- An investor who expects the market, sector or security to rise in price.
Bear- An investor who is pessimistic about the prospects for a market, a sector or a particular security
Bid- The highest price at which a buyer is willing to buy a particular security. The buyer may be a market maker or an ordinary investor
Bull Market- A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc.
Bear Market- A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc.
Blue Chip- A blue chip is a large and well established company, or its shares. The key criterion is that these are large companies, primarily in terms of market capitalisation. The term also implies financial strength and stability.
Broker- A broker is a party that mediates between a buyer and a seller.
Spread- The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.
Market Capitalization- It is measure of a company's total value. It is estimated by determining the cost of buying an entire business in its current state. Often referred to as "market cap", it is the total value of all outstanding shares. It is calculated by multiplying the number of shares outstanding by the current market price of one share.
Dividends- Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
BY
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