facebook How to Invest? Cultivating the good habits of money

How do I Invest?

When you buy an asset or deposit money into a bank to get future interest, you invest.

What is Saving?

Saving is keeping a portion of the money earned without spending it.

What are the needs to Invest?

The need can be anything. Here are a few examples.

  1. Your retirement
  2. Children’s education
  3. A marriage in the family
  4. Buy the house in your dreams

What is Inflation?

Inflation is either a rise in the prices or a fall in the value of money. The annualized inflation rate in India was 3.78% as of August 2015, as per the Indian Ministry of Statistics and Programme Implementation. However In India, we calculate the Inflation rates as the changes in the Wholesale Price Index (WPI), for all commodities.

What is Real Return?

Real return is your return on investment after deducting the inflation rate. The RBI website has the inflation rate details for you to test it.

Real Return = Return On Investment – Inflation Rate.

Example for Real Return:
Interest rate = 7%
Return on Investment (Consider Equity) = 20%
Real Return=13%

What are the Instruments in Investment?

  1. Stocks
  2. Gold
  3. Bonds, FD, RD-Interest related
  4. Real Estate
  5. Commodities

Comparison between instruments

 

InstrumentsReturnRiskLiquidityTaxation
StocksHigh ReturnHigh RiskHigh LiquidityUpto 1 Year
Real EstateMedium ReturnMedium RiskLow LiquidityTax Upon Sales
Bonds, FD, RDLow ReturnLow RiskMedium LiquidityUpto 1 Year
GoldMedium ReturnMedium RiskHigh LiquidityUpto 3 Years

 

Gold

Gold is a hedging tool against other instruments. It is an alternative to money. There are multiple ways to invest in gold.

  1. Physical Gold (coins, jewels, and bars)
  2. ETF Gold
TypeTaxPrice DepreciationTheft ThreatSources
Physical GoldWithin 3 YearsSome DepreciationYesJewel Shop
ETF GoldWithin 1 YearNo DepreciationNoExchanges

 

Stocks

Shares or Stock represent a fraction of ownership in a Business entity. On buying a Stock, we will be a part owner of the company. After buying the Share, we can get two benefits namely Dividend and Price Appreciation.

Companies sell Shares to the public to raise fund for repaying the loan or to further develop the company. However, there is no need to participate in the loss of the business, and we lose only the money paid to own the share on a worst case scenario.

Where are Stocks held?

Stocks bought on the IPO or Stock Exchange is kept safe in the Demat account in NSDL OR CDS in digital format. Shares can be bought and sold using a trading account.

Primary Market and Secondary Market

The primary market is where the company sell the shares directly to the investors using IPO. The secondary market is where the existing investors will sell the shares to the new
investors. Stock Exchanges serves as the secondary market, and India has two major Stock Exchanges:

  1. National Stock Exchange (NSE)
  2. Bombay Stock Exchange (BSE)

Types of Shares in the Market

Large-cap stocks have a little return, and therefore the risk is low as well. Mid-cap stocks have average risk and returns. A Small-cap stock has the highest risk and return. The entire market capitalisations of the respective classes are as under:

Large-capAbove Rs. 10,000 crore
Mid-cap2,000 to 10,000 crore
Small-capUp to 2,000 crore

Two ways to invest in the Stock Market

In Lump Sum – One can spend all the money at a time as an investment in the Stock Market, and it involves selection of good stock in low price and also the timing should be perfect.

In SIP – One can invest money periodically in regular intervals. It requires selection of good stock. However, the trouble with the perfect timing is relatively less in this scenario as the accumulation happens only at regular intervals.

What are the sectors to invest?

  1. Banking and Finance
  2. Information Technology
  3. Pharma
  4. Oil and Gas
  5. Telecom
  6. FMCG
  7. Infra and Capital Goods
  8. Metal and Chemical

How to Invest in Lumpsum?

  1. Select the sectors which are performing in the market.
  2. Now, choose a high performing stock in each sector.
  3. Allocate the fund to each of the sectors equally.
  4. Also, allocate 20% to Gold for hedging.
  5. Finally, wait for the correct entry, which is when the market is down, and the uptrend is clear.

How to Invest in SIP?

  1. Select the sectors which are performing in the market.
  2. Now, choose a high performing stock in each sector.
  3. Allocate the fund to each of the sectors equally.
  4. Also, allocate 20% to Gold for hedging.
  5. Finally, start investing in SIP monthly for a longer term.

Examples for SIP ( Rs. 5,000)

# of stocks to select = 4, each Rs. 1000
20% Gold allocation
Investment in Gold ETF = Rs. 1000 for 20 years
Total investment = Rs. 12,00,000.
Total return = Rs. 59,88,957 (S) + Rs. 7,59,368 (G) = Rs. 67,48,325 (min)
Gold Return = 10% (Approximately) per year
Stock Return = 15% (Approximately) per year

Examples for SIP ( Rs. 10,000)

# of stocks to select = 8, each Rs. 1000
20% Gold allocation
Investment in Gold ETF = Rs. 2000 for 20 years
Total investment = Rs. 24,00,000.
Total return = Rs. 1,19,77,915 (S) + Rs. 15,18,737 (G) = Rs. 1,34,96,652 (min)
Gold Return = 10% (Approximately) per year
Stock Return = 15% (Approximately) per year

Note: These estimations are solely based on the power of compounding.