Tuesday, November 28, 2006

Baby steps to Investing gyaan:

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If you are a novice at investing, terms such as stocks, bonds, badla, undha badla, yield, P/E ratio may sound Greek and Latin. Relax. If you made it through fifth grade math, you can do it, says Peter Lynch, a formidable man of investing.

To start with, take your investment decisions with as many facts as you can assimilate. But, understand that you can never know everything. Learning to live with the anxiety of the unknown is part of investing. Being enthusiastic about getting started is the first step, though daunting at the first instance.

Simply put, you should invest so that your money grows and shields you against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time.

By investing into the market right away you allow your investments more time to grow, whereby the concept of compounding interest swells your income by accumulating your earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors 1. Invest early 2. Invest regularly 3. Invest for long term and not short term

While it’s tempting to wait for the “best time” to invest, especially in a rising market, remember that the risk of waiting may be much greater than the potential rewards of participating. Trust in the power of compounding Compounding is growth via reinvestment of returns earned on your savings. Compounding has a snowballing effect because you earn income not only on the original investment but also on the reinvestment of dividend/interest accumulated over the years. The power of compounding is one of the most compelling reasons for investing as soon as possible.

Let's start with the first steps: There is always a first time for everything so also for investing. To invest you need capital free of any obligation. If you are not in the habit of saving sufficient amount every month, then you are not ready for investing. Our advice is :-

Save to atleast 4-5 months of your monthly income for emergencies. Do not invest from savings made for this purpose. Hold them in a liquid state and do not lock it up against any liability or in term deposits.

Save atleast 30-35 per cent of your monthly income. Stick to this practice and try to increase your savings.


Avoid unnecessary or lavish expenses as they add up to your savings. A dinner at Copper Chimney can always be avoided, the pleasures of avoiding it will be far greater if the amount is saved and invested.

Try gifting a bundle of share certificates to yourself on your marriage anniversary or your hubby’s birthday instead of spending your money on a lavish holiday package.

Clear all your high interest debts first out of the savings that you make. Credit card debts (revolving credits) and loans from pawnbrokers typically carry interest rates of between 24-36% annually. It is foolish to pay off debt by trying to first make money for that cause out of gambling or investing in stocks with whatever little money you hold. Infact its prudent to clear a portion of the debt with whatever amounts you have.

Retirement benefits is an ideal savings tool. Never opt out of retirement benefits in place of a consolidated pay cheque. You are then missing out on a substantial employer contribution into the fund.

The investing options are many, to name a few are Stocks, Bonds, Mutual funds, Fixed deposits, Others that include gold, real estate, commodities, art and crafts, antiques, foreign currency etc.
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