It is high time that you start investing. Reap the benefits of compounding by learning how to start investing today.
The COVID-19 pandemic has triggered a lot of people to look at their finances and gain more control over them. And it was obvious, COVID 19 emptied our savings, and what followed was a worldwide recession. So now is the time to start investing and ensuring that your money grows in a safe and steady manner. Without further delay, let’s get to some tips on how to start investing.
Compounding and Investing
The legendary investor Warren Buffett defines investing as “…the process of laying out money now to receive more money in the future.” And by that definition, it should be obvious that the earlier you start investing the better returns you will get. This is because of compounding. Let’s understand compounding in terms of numbers. If you invest 2000 per month, every month starting from the age of 20 to the age of 65, in assets that can give you a return of 10 per cent, you get a whopping 1. 25 crore rupees (without adjusting for inflation). That’s great for a mere 2000 per month. But what’s more interesting is the fact that if you start investing in the same way but from your 30s you end up getting just over 50 lakhs. 10 years can take away 50 per cent of the potential value of your money. Similarly, if you invest for 25 years starting from your 40s you get around 25 lakhs. That is the power of compounding.
Before you Start Investing
But before starting to invest, you will have to take care of a couple of things. Firstly, you have to make sure you have no loans. Avoid taking loans as much as you can. Because loan holds you back. Taking a personal or a car loan can set your investment journey back by a lot. But if you do have to take loans, repay them before you start investing. The second thing is insurance. Insurance is panning for something that is unforeseen. Life and health are the only types of optional insurance that we recommend. When selecting life insurance always opt for a term plan so that you can get maximum coverage. As a general rule, 20 to 25 times your annual income should be a good cover.
Now you’re ready to invest. It is recommended that you invest at least 20 percent of your total income. The more the better. Time to talk about your portfolio. If you’re young, avoid putting money in Fixed deposits. FDs give very low returns but are very safe. Older people who would rather protect their money than grow it, invest in FDs. We recommend that you divide your portfolio into 4 parts. 30 percent of your investments should go into stocks and equities. Experts recommend buying and holding these stocks. It is best to do some research on the trends and graphs of the companies you invest in. Investing in top companies in the market is always better. Another 40 percent of your investments should go into portfolio stocks. You can invest in portfolio stocks through mutual funds. In mutual funds top experts invest a pool of money into stocks they think will give the best returns. You don’t own any stocks but you get returns and you have to pay these experts from your returns. It’s a good way to invest if you’re too lazy to research. Smallcase by Zerodha is a similar tool for investing. In this, there are portfolios of stocks made by experts and you invest in these stocks. Here you actually own stocks. You can check the potential risk and retrospective returns of these portfolios and invest accordingly. Another 20 percent of your investments should go into sovereign gold bonds. Over the last 30 years, gold has given a 10 percent annual return, which is considered very good. Invest in sovereign gold bonds instead of buying physical gold. The last 10 percent can be invested in volatile assets like cryptocurrencies, which are high risk and may give high returns.
The best time to start investing is today. Enjoy the benefits of compounding while you can. Invest regularly and in a disciplined fashion. Regularly check on your investments and keep mixing up things if you see something not giving you satisfying returns. Young people can take greater risks with their money and they should as it generally pays off. And in case it doesn’t, you can always earn it back.
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