Art of Investing

You have laid down SMART financial goals. You have been earning and saving. Then what? Just savings do not protect your purchasing power. Due to inflation the cost of your financial goals increase. The catalyst that elevates your savings to the vicinity of your financial goals is investment. Investment makes the money work for you. Investment also has risk. You need to strike a balance between risk and return. Hence no wonder this session is going to be the longest.

The first principle of investing is "better late than never". But actually it is to "start early".  Investing is no rocket science that it is made out to be. Agreed that it is a bit complex, but the important aptitude is to understand one's requirement plu risk and understand the financial product well. Moreover, you don't need to be a car mechanic to learn driving. Operating a car and servicing them may need an effort to understand the mechanics of the car. But you need to understand the functions of the steering, gear, clutch and accelerator only to learn driving. Like investing, it may appear daunting for the newbie. But leave him on the steering for a week and there he goes.

The canons to be followed before making an investment are as under:

1. You have at least six months living expenses deposited in a bank, or in some other liquid form of savings, or
2. You have just acquired a sudden windfall or inheritance, which should be thought of as capital and not as current income.

Investment avenues - Asset Classes

An asset class is a broad investing category.

The respective asset classes reflect varying degrees of risk and return. The allocation of your savings into asset classes (i.e. which and how much investment of each is suitable for you) depend on your financial goals (the amount, the timeline – short term etc.) and risk profile.

How major asset classes perform during the 20 year period ending March 31, 2014

Few points to remember before investing

1) Strategies for investors

• Invest regularly
• Start early
• Harness the power of compounding
• Have realistic expectations

2) Good Investment will make money,bad investment will cost you money.

3) Understand the financial product you are investing on.

4) Philanthropy

• Nature gives back what it receives.
• Let us try giving something what one wants or requires the most.
• If one wants money, do some charity, if one wants contacts try giving to those whom you can help.

What reduces your return from investing?
Inflation is not the only thing you should be considering, there are other things too that eat into you money. The first thing is "brokerage" and the second thing is "taxation".

Principles of compounding
While it is helpful to understand the mathematics behind compounding, the ability to use a financial function calculator is probably more important.

There are generally four variables in any time-value-of-money problem: the time period, the interest rate or rate of return, the beginning value and the ending value. The advantage of knowing how to solve time-value-of-money problems is that it will allow them to handle a variety of "what if" scenarios in their personal lives, and they will be able to verify factors when dealing with financial products.

Risk and Return
Someone has said, "Biggest risk one can take is not to take one".

Overly cautious people who keep their money in a "safe" bank account face the risk that inflation will seriously erode their cash. Such people work hard but still retire poor with  a overwhelming sense of scarcity of money haunting them.

Those who chase after unrealistically high returns in "can't miss" deals may lose their money in speculative investments. Such people also end up reeling under money problems due to unpredictable fall in the value of their investment.

Well-informed people know how to make their money grow by balancing risk and return when they make saving and investing decisions. I am sure the reader of this book elevate themselves to become "well – informed" investor.

Myth and Reality

Risk Profile
Understanding one's risk profile is necessary. It enables you to allocate funds to various asset classes. Your risk profile depends on your responsibilities, level of income, values, habits etc.

Taxability of Investments
From taxability point of view your investment falls in any of the following category –