So how a beginner can learn the process of investing money?
Beginners has plethora of questions in their mind regarding investment. Some questions are ‘important’ and some are result of mere lack of understanding.
When beginners read more about investing money, their understanding about investment increases. As result their questions start getting answered on their own.
But the important questions may not get the right answers just by reading reference books. The problem is, reference books are too detailed and can confuse the beginner.
Beginners have huge potential to take risks. Due to their young age they can take much higher risks. But they still feel afraid to invest money. The reason being, lack of clarity about risk management.
If beginners only know the right answers to the following ‘questions’, they will practice investment fearlessly.
1. What is my risk taking capability?
If a person knows accurately their risk taking capability, they will invest very wisely. Invariably, wise investments gives full satisfaction to its investors.
But how ‘knowing’ ones risk taking capability leads to ‘full satisfaction’?
Majority simply jumps into investments without doing this essential check. This they do in sheer ignorance, as they do not know the ‘power of investing within ones risk taking zone’.
Lets take an example to understand the concept of investing within ones risk tolerance.
2. How risky investments like stock give high returns?
Stocks are risky because their price fluctuate every second. As these prices are so volatile, hence a person who invests in stocks for short term, has very high chances of incurring loss.
But the same stock price, when viewed with long term perspective, will show a definite growth curve.
How this is possible? On one side its is risky in short term, but it gives high returns in long term? Is this judgement logical or its just a farce statement made to promote stocks?
By no means this statement is farce. Stock are not just any piece of paper, they are basically a business divided into its smallest entities.
3. How a beginner should invest in stocks
For a common man, stock investing is very exciting but they avoid it due to the risks involved with it. The risk associated with stock investing can be minimised by learning more about stock analysis.
But not many has time nor patience to learn the skill of stock analysis.
So what is the alternative?
There is a fantastic financial instrument available for common man using which they can invest fearlessly in equity market.
I am talking about mutual funds. Expert fund managers buy stocks on behalf of us. Hence we are spared the headache of doing complicated analysis and stock purchasing.
To make equity investing even more risk free, one can invest in mutual funds through systematic investment plans (SIP’s).
Through SIP’s one does not invest all the money at a time. Lump sum amount is distributed into smaller sums of money and invested gradually over several months.
4. How I can create a risk free investment portfolio
It is not possible to build a risk free portfolio and also earn high returns.
If one desires high returns, one must buy riskier investment options like stocks, equity mutual funds etc.
But do not worry, there is a way to build a balanced investment portfolio.
One must target to keep several types of assets in ones investment portfolio.
When one is buying stock, he must also buy bank deposits. When one is buying equity mutual funds, one must also buy gold. When one is buying bonds and debentures, one must also buy real estate property.
If this sounds too complicated, I will suggest a more understandable and implementable solution.
Generally people invest their money to gain capital appreciation. This is a more risky form of investing.
If idea is to minimise the risk, focus should be on buying “income generating assets” instead of capital appreciation.
Income generating assets are less risky and they also give decent returns.
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