How to Start Investing: Step by Step Guide to Investing for Beginners
Are you one of those working individuals who have no insurance, no savings and certainly no investments? Are you one of those people who look around and see peers talking about buying their second home, making money in the market rallies and counting the endless zeroes of their retirement corpus; while you only count your missed opportunities and what-ifs? Can you never manage your Spend-Save-Invest ratio correctly even after earning a handsome amount? And well let’s not even go to the taxation part of it all. All this and you are still “trying” to make time to learn how to work around investing, grabbing the next great opportunity and retiring early?
Haven’t we already identified enough reasons in order to persuade you to continue reading? Well, if not, we could state more situations but that would only delay us from getting to the point. Investing is not all complex and confusing if understood right, and that’s what we are going to do for you. We won’t ask you not to party or take that vacation that you’ve been dying to escape to. Let’s decode investing in a way that will help you become richer without becoming a miser
Key Elements
The most elementary things to understand are:
- Starting Early – When you first start earning money, having the latest phone, a nice vacation, and the trendiest clothes appear more appealing than saving and learning to invest. Nonetheless, you’d eventually understand that for the longevity of your wealth you need to learn how to save and invest. Investing isn’t just about putting money into something. You must invest time in yourself in order to build skills and expertise that will pay off in the long run. What you need is a balance between spending, saving and investing. To attain this balance, you can easily refer to the golden rule of 50-30-20 wherein you spend 50% of your income on your needs, 30% on your wants and you save the remaining 20%.
- Power of Compounding – It’s not called the eighth wonder of the world for no reason. It is central to growing your money over time. Interest multiplying over time grows your money exponentially. So, the sooner you start investing your money, the more it will grow with.
- Taking care of Liabilities – Liabilities not only count in the debt that you have over your head and the accumulating EMIs but also future contingencies that could occur with or without prior notice. You, your health, the dependency of your family and the rest of your liabilities can be sorted out with this four-point approach, starting from building an emergency fund, getting a term insurance, getting a health insurance and finally paying off your education/credit/car loans. Your emergency fund rule should be to accumulate a sum equal to your six-month salary. For health insurance, make sure you get one that has a minimum coverage equal to the cost of a heart surgery in the city that you live. Your Term-Insurance cover should be a minimum of 20 times of your annual income.
Starting Small & Failing Small – Taking baby steps always helps. In this case, even if you fall or lose, you would not get too disheartened and afraid to enter the markets again. Taking big steps and risks without any prior knowledge and experience can cost you your hard-earned money big time.
Once you’ve mastered all of this, you’ll need to learn how to invest your money and where you should put it.
Tax Saving Instruments
Firstly, to invest you need to save. Look into your taxable income and how much of your tax do you currently save. Tax Saving (up to 1.5LPA) helps you save a portion of your tax that you can invest. Sections 80C and 80D are your best buddies since they tell you exactly what will save you money on taxes. They cover a number of areas including which we have cumulated a list of tax-saving investments for you.
EPF/PPF: Employee Provident Fund and Pension Provident Fund are two funds with a low-risk factor and consistent returns. Both of these tools are designed to help you save for retirement. EPF contributions are deducted from your pay each month. PPF investments can be made in a lump sum payment, monthly instalments, or for any length of time. Both are classified as Exempt-Exempt Exempt.
NPS: NPS or the National Pension Scheme contributor can make recurring contributions to a pension account throughout their working lives. They can withdraw a portion of their funds in a lump payment and use the remainder to purchase an annuity to ensure a steady income after they retire. You can open an NPS account in a post office, or your own bank also.
Sukanya Samriddhi Yojna- Well if you have a daughter then Sukanya Samriddhi Yojna can help you save tax and invest for her future at the same time. Your daughter must be 10-year-old or younger.
ELSS: Equity Linked Saving Scheme is a mutual fund scheme that is eligible for tax saving under Section 80C. it has a lock-in period of 3 years and can be used for short term investment purposes. You can invest in an ELSS through brokers directly like Upstox and Angel Broking or through Coin App by Zerodha. For this you’d need to have a Demat Account. Check out the best platforms for opening a Demat A/c here. {embed Resource Tool Kit Link}
Home Loan Principal or any other
Now before you go any further, we’d suggest you open a Demat Account. A Demat account is similar to a bank account, only to hold your shares and mutual fund baskets in their dematerialised form and to help you invest at a click of a button.
For opening a Demat Account and other platform recommendations from us, you can refer to our {Resource Toolkit}.
You can open your Demat Account here:
Zerodha: http://bit.ly/demat-zerodha
Upstox: http://bit.ly/upstox-trading
Angle One: https://tinyurl.com/yzmhe8fm
Equity Products
Equity products connect your returns directly to the performance of the markets and the company in which you are investing. Although, they require you to develop some skills and expertise it is going to pay you off well in the long run. For this also you have different options according to the degree of control you’d want to have.
Direct Stocks: If you are one of those people who do not mind spending time and effort on researching stocks and companies yourself then direct investing is suitable for you. Your thumb rule for how much to invest would be 100-your age = the total percentage of your investments in growth instruments.
For Example: if your age is 25 years, you would invest 75% (100-25) of your total investments in growth or equity instruments.
ETFs: These are exchange-traded funds that track an index, sector, commodity or any other asset. So, if you do not want to invest much time into researching all the companies of an industry, you could simply invest in ETFs. They are less time-intensive, low cost and give you a bunch of the company’s stocks that would be otherwise costly to buy individually. You can open a Demat Account and start investing in any ETF you like through it directly.
Smallcases: If you don’t want to spend too much time, energy and effort on researching stocks and building your portfolio, you could simply mirror one. Smallcase lets you invest in predefined, tried and tested portfolios of successful investors with just one click. Its like a basket of stocks that you can later rebalance. It also gives you different options like investing in global companies, investing in a basket of equity and debt or equity and gold, etc.
You explore more smallcases here: https://link.smallcase.com/a7CuM6k1Ihb
Debt Investing
80% of your total investment remaining after investing in equity products. These instruments provide you with fixed returns over a period of time. However, since the risk is low the returns might also be lower than the returns of equity products. Now comes the question of where to invest in debt instruments.
For Bonds you can start investing on Golden PI here: https://bit.ly/startgoldenpi
For Investing in Covered Bonds, start here: http://bit.ly/wintwealth
Alternate Investments
We are here categorizing all investment options other than equity and debt as alternate investments.
Gold
Although gold is a traditionally preferred investment option for Indians, it is technically a commodity and not an income-producing asset. Its pricing is based on the demand and supply forces. However, in times of crisis, gold proves to be a safer form of investment. Therefore, a part of our portfolio should contain gold investment. 5-10% of your total investment portfolio can ideally be held in the form of gold investment.
You can opt-in for different types of gold investments. To avoid making charges, storage risks and cost and risk of impurities, you could always forego physical gold investment for Sovereign Gold Bonds, Gold ETFs and gold Mutual Funds.
Invoice Discounting
Invoice discounting isn’t a new practice. It has been available to Institutions and HNIs for ages but retail investors could never really hold of this market. With invoice discounting, retail investors who want to invest some amount without the risk of the stock market can look into this alternate investment option. TradeCred is a platform that helps you invest your money through invoice discounting. Although it is not SEBI registered, TradeCred follows several investor-friendly practices that ensure the safety of your money.
You can start investing in TradeCred here: http://bitly.com/tradecred
Other Things to Keep in Mind:
You are almost all set but there are just a few touch-ups left before we let you go experience the world of investing.
- Diversification is the key but over-diversification is harmful. Do not end up over diversifying your portfolio. The greater number of stocks you buy, the more time you have to invest into tracking the growth and the performance of those stocks and industries. Just as too many cooks spoil the broth, too much diversification would also spoil your portfolio. However, this does not mean you forego diversification completely. Remember, never put all your eggs in one basket but also remember to use only as many baskets as you can carry.
- Risk Management is also extremely crucial. Try not to invest on stock tips without understanding the stocks yourself. Learn the fundamental skills required like fundamental and technical analysis etc. Try to stay clear of highly risky investments and products that are still at their introduction stage. Be it penny stocks, cryptocurrencies, NFTs, stocks, mutual funds, etc. invest only and only when you completely understand the investment.
- Earn-Save-Invest. Repeat. Enjoy your life, spend on your wants and your dreams but only from the income allocated to wants not from the income allocated for saving & investing. Remember to save first, spend later and invest right.