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4 Easy Steps to Start Your Investment Journey

12 Mins 29 Mar 2024 0 COMMENT

4 Easy Steps to Start Your Investment Journey

Making investments in financial instruments which are likely to provide robust growth to one’s wealth have become extremely popular in the past few years. Financial instruments like equities, bonds, mutual funds, and ETFs amongst others take the centre stage when investors are thinking about wealth creation. In this article, we will take a look at some easy steps investors can undertake while starting their investment journeys.

Let us begin by understanding the planning phase and why planning one’s investments is so crucial.

1. Planning Stage

The planning stage consists of tasks like assessing one’s current financial conditions and determining one’s financial goals. It involves computing the desired returns which need to be achieved in a specified timeframe. The plan also needs to be cognizant of obligations like further education for oneself or for their children, taking care of aging parents and accounting for random and unforeseen contingency expenses. This stage is important as it serves as the set of guiding principles which one must check with before making any major financial decisions. It also helps one stay on track in their investment journey.

The next step is to purchase life insurance and health insurance.

2. Get Insurance Coverage

Having insurance coverage is one of the best ways of protecting the financial situation of one’s family, in the event of the breadwinner of the family passing away. A life insurance policy should ideally be purchased, and the insurance pay-out should preferably be at least 15 to 20 times the annual income of the individual.

On similar lines, having health insurance also comes with great benefits in the event of emergency hospitalizations. The hospital bills one usually gets after a medical emergency can have a detrimental impact on one’s finances, so it becomes imperative to have a health insurance policy covering all the members of the family to minimize the financial risk.

3. Creation of an Emergency Fund

The next step would be the creation of an emergency fund, which is advisable to be worth at least 6 months of one’s regular expenses. In today’s volatile times, one can’t predict when they would be laid-off from their jobs and will have to start looking for new opportunities. Absence of sufficient funds in such times can put tremendous pressure on one’s finances and might also eat into any savings and investments made. An emergency fund can very well help one sustain themselves and their families in such periods until another source of regular income is secured.

After the set-up of these initial financial safety nets is complete, one can then start thinking about investing their money into assets which can generate wealth for them over a period of time.

4.Understand Different Investment Options

It is likely that one might only be able to invest a portion of their overall income into prospective investments, as they would also have to take care of day-to-day staple requirements like rent, food costs and electricity bills, amongst a host of other expenses. It then becomes paramount to ensure that one stays on the path to increase their income regularly, while also trying to control their spending habits on things and situations which might not really be an immediate need.

As one’s income increases gradually, the component of that which is invested should also increase proportionally, so as to take complete advantage of the compounding nature of investments.

It is also very essential to choose a suitable asset class which coincides with one’s goals, investment horizon, and risk return profile. Let us take a brief look at some asset classes.

Equity

Equity, which is commonly known as shares or stocks of a company, refers to the ownership of the company granted to the shareholder in proportion of the shares held by the person. Investors can generate wealth by investing in this asset class through two means, one by capital appreciation, that is, by the increase in the price of the stock overtime, and the second is through dividends, which is the act of the company distributing their surplus profits amongst investors. Equity is usually considered to be one of the best asset classes, with respect to the potential to generate the most returns in long-term. Equity investments also come with a higher risk as returns could be volatile.

Debt

Debt, as an asset class, falls under the category of fixed income instruments like private bonds issued by corporates and bonds issued by the government. Debt instruments are generally known to pay their holders a fixed amount of money as interest on the money which the debt holder has lent to the debt issuer. At the end of the maturity of the instrument, the issuer returns the original principal lent to it by the investor. Debt is considered as a stable asset class in terms of returns delivered, with less risk associated with them along with lesser potential of returns, relative to equity. Debt is considered an ideal investment for the short term or where investors want stable returns.

Mutual Funds

Mutual funds are investment vehicles which pool together the money from multiple investors in order to take position in a diversified portfolio of securities. These securities can either be stocks or bonds, depending upon the type of the mutual fund. Within this, funds can be further classified according to their investment mandates, like whether they invest in small cap stocks or blue-chip stocks. Mutual funds are managed by professional fund managers who make decisions based on thorough research and analysis to choose which securities to buy and sell to fulfil the investment mandate of the fund. Due to their nature as an asset class, mutual funds provide investors some diversification in their investments to protect one’s gains from adverse movements in the markets. The riskiness of the funds depends on the type of securities the funds invest in. A mutual fund is an ideal investment vehicle for those investors who do not have the time or skills to choose individual stocks or bonds for their portfolio.

ETFs

Exchange traded funds, also known as ETFs, are similar to mutual funds as they invest in baskets of securities as well. But unlike mutual funds, the units of an ETF are tradable in the market with dynamic price movements during the trading hours. One advantage which they offer on top of the diversification associated with them is the liquidity. One can simply buy or sell the units of the ETF in the market and also tend to have lower expense ratios relative to mutual funds. ETFs differ amongst themselves according to their investment mandates as well, an ETF might be built to track a particular economic sector or a stock market index, or track other asset classes like bonds or gold.

Overall, one’s investment planning requires thorough due diligence across multiple parameters to maximize the chances of creating wealth while minimizing the risks associated with the investments.

Let us now conclude with a summary of everything we discussed today.

Conclusion

We understand the importance of planning one's finances and setting financial goals with specific timelines. The first step is to have sufficient life and health insurance coverage to meet any contingencies. The next step is to have an emergency fund worth at least six months of expenses. After getting insurance coverage and creating an emergency fund, one needs to start investing in various asset classes as per one's goals and time horizon.