5 Easy Tips Regarding Investments for People from Non-Financial Background

In the current economic landscape, a salary from a regular job is increasingly becoming enough for the average person, let alone a household. Investing your money is a good way to allow your savings to grow over time and making your money work for you, instead of the other way around.

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Why Should We Invest?

Why shouldn’t you invest? There are plenty of reasons: profits, increasing wealth and saving for a rainy day, and attaining whatever goals you may have - whether in the short term of long-term. But the most important incentive to start investing is to beat inflation. Your money loses value when it is idle - simply because inflation reduces its purchasing power. In just a matter of 10 years, we have seen how the value of our currency has dipped, even when measured against all sorts of commodities. When we need to set aside money for prospects like education, buying a car or a house; it may not be as simple as storing money and withdrawing it when required. Such situations need you to protect yourself against inflation, or you might end up losing a chunk of hard-earned money. This is where investments come to the rescue. And honestly, they don’t have the steep learning curve most folks assume. Let’s look at 5 easy investment tips for people from a non-financial background.

1. Start investing now

A Chinese proverb goes - “The best time to plant a tree was 20 years ago. The second-best time is now”.

Right now, is as good a time as any to begin investing. More time allows you to take more risks, and a bad investment or two might not prove too impactful over time. Ventures that are more volatile in a short period of time have higher returns over a longer period. There is also the obvious accumulation of wealth over time. Since money invested is compounded over time, the more time you invest in an investment, the greater are your returns.

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Chart out a plan

Once you are mentally prepared to start investing, you need to have an immediate plan and a long-term goal in place. You should know how much money you can spare for investment(s), so that even if you happen to incur a loss, it doesn’t directly impact your day to day life. Next, you must also know what you are investing for - it could be for your education, to buy a car or retirement plan. Depending on the duration of your investment, you can invest in stocks of varying risks. If you are planning for a long term, you can invest in riskier stocks. However, if the returns are required in a shorter duration of time, we need to choose stocks that are not too volatile.

Be aware of your risk tolerance

When we talk about investments, risks and rewards are synonymous. The more comfortable you are with taking risks, the greater the probability of higher returns. Risk tolerance is an important attribute that can ensure more success in investments. A high-risk tolerant investor may receive higher returns. This of course, comes with experience and understanding. A conservative risk tolerant investor accepts little volatility in their portfolio. They look for liquid stocks and guaranteed returns. However, they must accept the fact that they may receive lower returns over a period.

Diversify your portfolio

The key to a well-rounded and good portfolio is diversification. This is a perfect embodiment of the saying ‘Don’t put all your eggs in one basket’. Instead of channeling your funds into one stock, fund or any single asset, split it among multiple stocks, bonds and mutual funds. While this may reduce the upside on the potential return you may make, expect a safer, more stable portfolio when you diversify. Diversifying your portfolio reduces volatility and risks. If a component of your portfolio dips into a loss, it will not affect your overall portfolio since the gains from the others will assist in fighting its impact. If all your stocks incur loss, it's probably 2008.

A representation of portfolio diversification.

Keep investing regularly

Once you begin your investment journey, it is a good idea to keep at it. Investing regularly (via SIPs, for example), rather in lump sums, serves two purposes:

- By investing regularly, you can even out the volatility of the market in your portfolio. Any losses from an investment will ultimately be met with profits somewhere to even it out.

- It also allows you some liquidity to manage your short-term expenses and goals, since you’re not putting away a large chunk of your funds.

Funds from HDFC mutual funds are a great place to begin this journey, where you can start a Systematic Investment Plan (SIP) with as low as Rs. 500. Click here to know more about this fund house amongst others.