Before we get into specific things that you should invest in, let us
take a look at the general procedure of investing. How you should view
investments, what are “risk-profiles” etc. These are the
basic concepts of investing that will guide you though all your
investments.
As we mentioned earlier, there are many reasons why you should
invest. Some of them are “short” or
“medium-term” things like the “big buys” that
you want to make. Some of them are more “long-term” like
“you want to retire at 45” or “you want to become a
crorepati at 45” etc. Setting the objectives for an investment
before making a particular investment is the first step!
Just to give you an idea, let us take an example. Suppose there is a
Mr.Raju and he wants to take his wife for a trip 5 years from now. Now,
Mr.Raju has a elaborate trip planned for his wife. He calculated his
expenses and it has come to Rs.400,000. Raju is wise and he knows all
the bad effects
of taking a loan from the bank so he has decided to invest some money
every month so that 5 years from now he has Rs.400,000 in hand.
This is Raju’s investment objective. This is what Raju keeps in
mind while investing. So Raju finally does the required calculations
and figures out that: If he invests only Rs.6,800 every month then
after five years, if the money grows at 15% then he will have
Rs.587,000. Raju thinks that this is perfect since he can afford to
invest Rs.6800 each month.
This is how investments are done. Before you make any investment, you
must first decide “why are you making that particular
investment?”. Then you will know how much money you need to
accumulate and in how much time. Once this is known, you can calculate
backwards and you will know how much you need to invest each month to
reach your aim.
Don’t just make random investments. This generally gives you the
feeling that you are investing a lot but later on you will realize that
it was not much since you invested in an unorganized manner! Before
making any investment, decide your investment objective. This means
that you have to basically decide two things:
In investments there is a relationship between “risks”
and “returns”. The higher the risks the higher the returns.
The lower the risks the lower the returns. There are some investments
you can make which will “double” your money within a very
short time. However, these investments are really “dicy” or
“risky”. If they do not go as planned, you may end up
losing the money you invested.
For example, a friend of yours comes to you and says, “I have a
great business plan! I want Rs.40,000 from you and within 6 months I
will give you Rs.80,000! Please help me out…” This might
work, or it might fail badly. The risk involved is high. However, the
return of the investment is also quite high! A 100% rate of return in 6
months!
There are other investments that are very secure. They have very little
or no risk involved in them. For example, if you invest your money in a
bank that offers a 6% interest rate, then irrespective of what happens,
your money will grow at the small rate of 6% each year.
So, basically, before you invest, you first need to check out what is
the risk associated with the investment. Is it a risky investment? Can
you end up losing all the money you invested? Or is a safe or
“sure-shot” investment?
Then you need to see your situation and your “investment
objectives”! Can you handle the risk of the investment? Is it
crucial that the investment pays off for your objectives to be
accomplished? Is the time in which your objective must completed so low
that you NEED to take up a risky investment with high returns?
Think wisely about this and your situation and your objectives! If you
do not, you may end up losing a lot of money! Think practically and
realistically! We are not able to give you more practical information
about this because everyone has a different situation and different
objectives and can take up a different amounts of risk.
Generally young people can take up more risk. They have time on their
side! Even if something bad happens and the risk causes them to loose
some money, they can always recover it since they are young. Since
young people can take more risks, they can enjoy higher returns also.
One more benefit of investing when you are young!
Older people cannot take up so much risk! They do not have time on
their hands. If they loose too much money, they do not have that much
earning power and they may never recover from the
loss.
Next, when we talk about all the possible ways in which you can invest
your money, we will also talk about the risk and returns involved in
each kind of investment!
Next - Investing in Mutual Funds! >>
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