How to Invest: Basic investment strategies

Last Updated: Thu, Jul 27, 2017 18:36 hrs
Rupee (AP Photo)

If you want to make a reasonable headway to build your wealth, simply saving money in a bank account or keeping surplus cash at home won't be enough. You have to maximise your savings to generate wealth. Investing your money is an important component to financial prosperity and a secured future. It helps your pocket more returns on the money you employ, rather than a typical savings account.

But before you go ahead with investing, you must have a strategy in place. Haphazard or imprudent investments will only lead to a financial loss. Financial planners recommend keeping an accessible emergency fund ready, with a minimum of six months' worth of your household income, before you can even think of investing. In case you face a medical emergency or a job loss, this money will be available to meet them. Once you have the emergency fund in place, you can take up the following investment strategies.

Stay diversified

Whenever you decide to start investing, remember the old age: Never put all your eggs in one basket. For instance, consider a large-cap growth mutual fund. Such a fund invests money in big companies and is already diversified to a considerable extent. A mutual fund pools in money from a number of investors and invests in shares of several companies. An experienced fund manager, with assistance from a team of seasoned financial analysts, takes informed decisions to invest in stocks of various leading companies. Large-cap funds often hold stocks of maybe more than a 100 companies. Many of these companies have products that are household names and used daily. Some of these companies maybe market out performers while others may not live up to their potential. But when you spread the risks across a variety of stocks, it lessens your risk of investing in just a single company which may have a bad year. Fund managers, courtesy their experience, have the foresight to identify poor performers and replace them with companies that have brighter prospects.

Spread the risk

Large-cap mutual funds, investing in domestic stocks, are a nice growth strategy. These stocks don't move in tandem with the global markets. During times of recession, investing in stocks that are not connected to global economic and political movements, will keep you immune from risks. The more you spread your risks, the less is your chance to face losses. Small and mid-cap stocks often perform well when the global market is threatened. Money always follows companies that have a good business model, and innovative products and services, notwithstanding the state of the economy.

Rupee-cost averaging

Invest your money gradually, rather than all in one. Parking all your money in the stock or bond market at one go has certain disadvantages. Systematically investing a fixed amount over a period of time gives you the rupee-cost averaging. For instance, you can invest ₹500 each month for 12 months, instead of investing ₹6,000 in one shot. Rupee-cost averaging reduces your risk of investing in a product at a wrong time. You buy a lesser number of shares when the price is high, and more when the price is less. Such a strategy helps you to iron out market volatilities.

Asset allocation

Different asset classes like bonds, stocks, and cash, react differently under a similar economic condition. Stocks, for instance, do well under low inflation and when interest rates drop. Bonds, on the other hand, perform well in a slowing economy. Unlike stocks, demand for bonds is determined by their rates of interest. Liquid assets, like cash, act as a failsafe when both bonds and stocks perform poorly.

Some asset classes are better performers over time compared to others. Stocks and mutual funds investing solely in shares are winners in the long-term. But they are extremely volatile over the short term. Bonds, on their part, are more stable in the short term in the face of changing interest rates than their long term counterparts.

Do your homework

Self-education is the best way to learn about individual companies. Look at the wealth of companies that come out with products and services that are utilised every day. It's not a tall order to zero in on large and stable companies, governed by a sound management. Investing in stocks carries a greater risk than mutual funds, but they also yield higher returns. Utility companies and consumer giants are usually the best to start investing. There's no dearth of information on companies coming out with a great new product or service. A solid base of safe assets and growth-driven mutual funds is just what you need to set foot on the road to wealth generation.

Naval Goel is Founder & CEO PolicyX.com

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