Investment is neither a complicated nor a difficult process. There are a set of golden rules which helps investors to stay on track to meet their ultimate financial goals. When it comes to managing money, investment acts as a key part to build wealth. Initially, you may find it difficult as to which product to choose, where to invest, how much funds to park and so on. But as you go on and proceed, you will have a better understanding as to how the investment market works.
One thing which all the investors should keep in mind is irrespective of how much ever disciplined they are and whichever set of rules they follow, investment involves a certain amount of risk and you may or may not reap your desired results.
Let's understand in brief about the meaning of term investment and its golden rules.
What is an Investment?
The term investment refers to an asset or an item acquired to generate appreciation or income. In terms of economics, an investment is the purchase of goods which are not con-umed today but are used in future to create wealth.
In finance, the term investment is a monetary asset bought with an idea that it will provide (generate) income in the future or can be sold at a higher price for profit at a later point of time.
After understanding the meaning of investment let's explore the set of Golden Rules Of Investment.
The key to building wealth is to begin your investment at an early age in life. Time plays an important role in every individual's life and it acts as one of the most powerful ingredients when it comes to an investment as well. The power of compound interest helps an individual's money to grow as it uses this concept and puts your money to work.
Set A Goal
When you are aware of your financial goals and the time frame to reach the same has been set, half of the job is done. You can stick to your strategy without worrying much.
For Example: If you are having a goal to save for your retirement (long term goal), and assume it is after many years, you may be less allured to decline your investments before you stop work.
As you are aware that investment comes with inherent risk, but still there are ways wherein you can be proactive and protect yourself from financial windfalls. Diversifying your investment plays a very important role as it reduces the risk factor to a great extent.
As the famous saying goes - "Don't put all your eggs in one basket." - the saying holds good for investments too. Chalk out a plan and have a well and properly diversified portfolio by parking your funds into an array of investment options like stocks, debt, fixed deposits, cash, government securities, mutual funds, assets, gold and so on.
It is better to create a healthy mix so that you can reap the gains you want, by reducing your overall risk factor.
Invest for Long – Term
Investing for the long term will fetch you good returns. The longer you invest, the higher the potential effect of compounded performance on the original value of your invested money. Most of the investors will be familiar with the term compounding, thanks to the fixed deposit accounts which has the feature of compounding on the initial invested money.
The term compounding refers to the process wherein the interest on your money is added to the principal amount and then, in turn, it earns interest. Over some time, compounding will make a huge difference, as it shores up interest. The same turns true for investment returns, so long as you reinvest, the income also grows.
Markets are subject to volatility and so is your invested money. Investors must do a regular check on markets to stay on top of your invested money. At times, there is a possibility that your initial asset allocation may get out of balance and hence there will be a need to rebalance.
Take for Example Stock markets keep fluctuating day in and day out and it will effectively impact the investor's wealth. Hence it will be mandatory for investors to maintain the percentage of bonds and stocks which will help you to reach your set goals and if you do not initiate the required action on time, the regular market fluctuations may wipe away your investments just in a matter of few seconds.
As a part of the rebalancing process, one can either buy or sell a certain set of investments to get back the desired asset allocation and this will help you to prevent your portfolio from becoming too aggressive thus minimizing the risk factor.
Focus on Real Rate of Return
The changing inflation, tax rules and charges will directly impact the real rate of return on your original invested amount. Though certain options are available for an investor to reduce cost and they include inflation-protected instruments such as index-linked bonds, interest-bearing loans wherein both the loan amount and interest payments are related to a specific price index or be it property holdings (commercial), wherein rents can be hiked in line to counter the rising rate of inflation.
If an investor focuses on the real rate of return which an investment fetches him or her, they will be able to plan in a better way to reach their desired financial goal amidst uncertain external factors.
Always Invest in What You Understand
A well-constructed portfolio can earn you healthy returns and vice-versa. It is very easy to incur heavy and irrecoverable losses by parking your money into assets which behaves unexpectedly. It is always advisable for investors to take some time and go in detail about the investment portfolios to understand various aspects related to it, better before they zero in on a specific plan to park their money.
Understand the risk factor, the returns which it promises to fetch, its features, charges, time duration of investment and so on.
If you are unable to understand certain investment plans then do seek advice from a professional before taking a final decision.
For example, the offer document explains a fund's charges, its features. An investor should read this before heading for investment. If you are investing in individual business, then make sure you know about what the company is about, what it does, promoters, project, financial details, how it is planning to make money in future and so on.
About the Author
Archana is a content writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.