scorecardresearchA beginner's guide on when to start investing

A beginner's guide on when to start investing

Updated: 25 May 2022, 07:36 AM IST
TL;DR.

Investing is a technical process and starting right makes all the difference. It is important to know the right time to invest and take the plunge only when you are ready. Everyone might have a different timing but starting early in your journey bears fruitful outcomes in the long run.

Time is money and hence the earlier you start and the more time you have, the better off your investments can be expected to be.

Time is money and hence the earlier you start and the more time you have, the better off your investments can be expected to be.

Investing in financial instruments is an attractive course of action to earn returns. More and more individuals are choosing to invest nowadays, but this intriguing process requires one to have a firm grasp on the know-how of the procedure.

Many young professionals and students express the concern that they are not sure about when to start. Continue reading as this guide answers all the questions you might have about starting your investment process.

What are investments and when is the right time to start investing?

Investing is an economic activity that individuals undertake in the hope of earning returns. The individuals who engage in investing also called “investors” allocate their money in financial schemes or instruments to gain returns from their activity.

These financial schemes and instruments are what are known as investments. When a person makes an investment he/she buys a financial product by paying the market price and the profits/ losses that will be borne depend on the market fluctuations.

It is best to start investing early in life as soon as one is financially ready. If you are a young professional who can comfortably meet ends with some income to spare, it might be the right time for you to begin. Additionally, you must be familiar with the complexities of the whole investment apparatus to the extent that you can avoid evitable risks and losses.

Why is it important to know the right time to start making investments?

It is paramount to know the right time to commence your investment adventure to ensure that your non-negotiable expenses do not suffer. If you’re not ready and take the plunge anyway, it is probable that it becomes difficult for you to pay for your routine bills and spending.

What you need to do to calculate the right time is list down your financial goals and prioritise them. Accordingly, create a budget with a planned structure. Following this, identify your risk appetite and the degree of your tolerance so that you can invest in securities that suit your profile.

Once you have sketched out all these intricacies you can determine the appropriate time to start your investment process.

How can you benefit by starting to invest early in your career?

“Time is money” and hence the earlier you start and the more time you have, the better off your investments can be expected to be. Let’s look into the reasons to uphold this assertion.

More time, more growth: The earlier you start investing, the more time your investment will have to grow. More growth implies higher returns and ultimately when you decide to liquidate your investment, you will have a higher amount of money in hand.

Not only would your corpus have extra time for capital appreciation but your losses also will have a safety cushion in terms of longer recovery time.

Increased knowledge and expertise: Experience gives the greatest lessons. Starting early essentially gives you a headstart to invest effectively in later years relatively due to the higher knowledge and skills you accumulate. It familiarises you with the common mistakes that you can avoid making while investing a bigger corpus in the future.

Risk tolerance: It is human nature that the abundant risk-taking abilities that come with youth tend to fade as old age approaches. As you invest in more volatile (riskier) investments there are higher chances to make a high profit.

Power of compounding: The power of compounding grows your corpus exponentially as time passes. The later you start, the higher amount of money is forgone that could have instead been gained. Investments that bear compound interest bear interest on not only the principal but in subsequent months also add the interest of the last period to the initial investment amount, Thus, forming a cycle that grows the investment multiple folds.

Additional income to fund your goals: The income from investments can also support you to achieve your financial goals and starting early can aid you to realise your long-term goals sooner. Thus, investing early can create an additional revenue stream when you are young that can give a boost to your financial objectives.

Securing retirement corpus: Building a retirement corpus is expensive as the ideal retirement fund should equal at least 10 years of your income. The later you start building this fund the higher financial burden you will have to deal with. To eliminate this stress, it is advisable to start investing as early as possible to secure and maintain financial stability in the future.

With what amount should newbie investors start?

There is no rule of thumb for any fixed amount with which one should start investing. It completely depends on your income, expenses, and the amount you have to spare. One should follow his/her own budget plan and in case you’re following a budgeting rule like the 50-30-20 rule, demarcation for investment money should be done according to your budget’s structure.

If you start early enough even modest investment amounts can bring humongous returns. Consider this: if you invest Rs. 100 every month in a SIP from when you are 25 years old till the time you turn 60, at a 10% rate of interest you will have accumulated 7,70,000.

Hence, even an amount as small as 200 is a viable option and there is no threshold or limit on the amount you should invest. It should be according to your risk tolerance and overall investor profile.

What is the concept of "buying the dips"?

“Buying the dips” is an investment strategy adopted by a lot of investors. It refers to the practice of buying an asset when its market price falls with the hope that the price will rise in the future and the investor will then earn profits from the appreciation. This is not a long-term investment plan and the investors aim to buy low and sell high. Its success or failure depends on the market fluctuations and timing.

How is the strategy of buying the dips beneficial? Should you start investing according to this strategy?

The strategy is beneficial as financial instruments can be bought at a cheaper rate than their usual market price. It acquaints one well with how the market works as it necessitates a lot of research.

This is a risky strategy implemented by seasoned investors. Past performance of an asset may not be the best reflector of the future performance and a lot of factors have to be considered while executing this. One stands a chance to earn plenty of profits but at the same time can incur a huge loss. Only if you choose the right asset can you profit from this.

Thus, it is not advisable for novice investors for the reason that they may get demotivated if they lose money. It is not beginner-friendly and as it is speculative in nature, without proper knowledge and experience the thin line between speculation and gambling is obliterated.

What mistakes should be avoided while making investments?

The following are some classic mistakes made by novice inventors that you can learn from:

Not having an action plan: The biggest blunder that one can make while investing is depending on luck and expending money without any plan of action. To succeed, it is crucial to outline an investment plan and consolidate it with your financial budget. Only when you have drawn out a path to follow can you implement it to realise your financial goals.

Not assessing risks: Investments are risky and one should not bite more than one can chew. Therefore, not assessing the risks of investing in an asset and not aligning it with your risk appetite is a classic mistake that should be avoided at all times.

Relying totally on past performance of assets: The past performance of an asset does not guarantee its future results. There are many external factors such as new laws, international market conditions, etc. that may dictate the behaviour of an asset. So completely relying on past data before taking a plunge may lead to unfavourable outcomes.

Relying on incompetent sources of information: These days millennial investors tend to “follow the trend” and jump on a bandwagon based on information spread across social media and unreliable sources. This is an unhealthy practice and readers are encouraged to gain proper understanding and draw decisions only after seeking information from trusted sources.

Investing the whole corpus in one asset: Not diversifying your investment portfolio increases the risk of losing your corpus. Portfolio diversification is important to balance the risk factors and stand a better chance to gain from multiple financial instruments. Hence, investing the whole corpus in one asset is another mistake one should remain wary of.

The process of starting to invest might seem daunting at first, but if you arm yourself with the required knowledge you are all set to begin your journey.

 

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First Published: 24 May 2022, 05:56 PM IST