Investing 101

Well, you’ve started earning. Spent your first year of salaries on parties, booze, clothing, some cool gadgets or shoes to show off, concerts, Goa? It was a time well spent just having fun and chilling. Suddenly you realize your first year of employment is over and your bank balance is well, shameful to say the least. That’s the time we realize it’s probably time to save money – didn’t our parents always tell us to save? Well, maybe they were right. Let’s start saving!

While you spend your first few gruesome months tightening your pockets, you probably haven’t thought about what you are going to do with the saved money. Where do I put the money in, a FD? A recurring deposit? Let’s start with a few terms that you should know and then we will get into some of the popular methods of investing/saving money.

Let’s start with “Risk” – essentially people in the finance industry use this term to quantify the loss that the investment can make (yeah, you don’t really know it could make a loss but they use some probability calculations to make it less vague – it makes understanding the potential easier). In simple terms – if there is a 20% chance that you will lose money by investing. Another way of looking at it is if it’s a 20% risk – then I am willing to lose 20% of the money (you don’t really want to but if you did you could live through it)

Why would someone be willing to take a risk then? Lose 20% of my money – are you crazy? Well, as they say “Higher the Risk higher the Return”. Most of you will probably understand what return means but in simple terms – it’s the extra money you get for taking the risk of giving money to someone else.

Did we digress? Wasn’t I here to read about what investments to make? Well, let’s get on with that then.

Fixed Deposit – This is one of the most common forms of investment people use. You put in a fixed lump sum and get a fixed amount at the completion of the term. The risk is negligible (you will only lose your money when the bank shuts down – yeah, unlikely to happen soon). The returns are around 8-9% currently. This is the investment to make if you cannot afford to lose a single penny. The return is close to inflation rates and hence doesn’t really generate money but keeps it safe.

Recurring Deposit – This is a more regular version of the fixed deposit. Where you can put in a monthly/quarterly/half yearly amount without going through the process of making multiple FDs. Again negligible risk. Just enough return to keep your money safe (8-9% again).

Stock Market (Equity) – This is the other end of the spectrum. High Risk, High Return. People can expect around 40% risk and a return of around 15-40%. While I was growing up I was always told it’s a bad place to put money in. We put in an x amount now we have one-tenth of x. Well, the truth is this happens. All you need is research to invest here. Simply taking a look at how the company is doing, what are the future prospects? Questions like these will make sure you will not make a loss in the long term. In the short term, the market is very sensitive and volatile. I would recommend that you never invest here if you have not done research. If you have, this is probably the only place where you can actually make money from money. You get dividends, bonus, rights issues – a lot of extra side income here.

Mutual Funds – This is a safer version of investing in the stock market where you get a fund manager who does all the research for you and invests in a full variety of stocks so that it is less likely that you lose money. These are basically schemes offered by banks or financial companies. You can expect a risk of 15% with a return of around 10-15%. This return largely depends on the index (Sensex, Nifty) as it maybe way higher or lower depending on what’s happening in the world. Like in 2008 when it crashed – these mutual funds also made a loss. Well, when everything is crashing there isn’t really stuff to save you in this form of investment. One more thing – some of these mutual funds give you tax exemptions.

SIPs (Systematic Investment Plans) – This is the recurring deposit version of a mutual fund. It basically allows you to invest regularly. An extra feature of this is that it averages your costs so that your profit or losses are lower on a whole (How is this possible? It’s slightly complicated and will explain in detail when I get a chance to cover this in more detail). So this is a safer version of the mutual fund with a regular deposit method. Expected risk of 10-15% with a return of around 12% – 15%.

These are the most popular means of investment. Most people use either Fixed Deposits or SIPs depending on how safe they want their money to be. There are more options like Debts, Bonds, Futures, Forex but they are less open or lucrative for casual investors who can’t spend a lot of time on research and understanding the market. I am hoping that this helped you and I’ll cover these more in detail depending on the feedback that I get 🙂