Investing can be a pretty daunting task if you are a first-time investor. Questions such as how much should you invest, what should be your portfolio like, how you can diversify your investments, what is the tax implications et al may cloud your mind. Fret not, we got you covered on all the savings and investment tips, tricks and options that you need to keep in mind before you get going. Read on:
Determine your cash flow: First things first. Calculate the amount you can actually save and are ready to invest after deducting all your expenses from your income. Once you arrive at a value it is easier to take the decision because investment cannot be a hurried and impulsive step. It has to be well thought out, and only once you have a tentative figure in mind, can you move forward.
Set the tenure of your investment: Are you looking at short-term goals? Or are you ready to give a good few years to your investment? Whether you are looking at saving for your post-retirement life, for your child’s education or marriage expenses or for anything else, a great savings tip is to always set long-term goals. Investing in stocks, shares and mutual funds are great options when you are looking at long-term investment. If you wish to invest in an instrument for a short period of time with the flexibility of withdrawing your fund whenever you wish to, you can look at saving deposit schemes in banks such as IDFC. You can also opt for fixed deposits, which come with a minimum lock-in period that ranges from seven to 46 days. Recurring deposits have to be done for at least six months, post that which you can withdraw the entire money.
Your investment will grow based on the amount of capital you have invested, the period of investment and the annual earnings on the capital. Investment tip: The earlier you begin the more value will you get for your money.
Research as much as possible: Study all the investment options as much as possible. Say for instance if you are looking at simple savings deposits, you must know that while most banks offer about 3.5 percent on savings deposit schemes, there are banks such as IDFC, which offer 4 per cent interest rate. There may be some other bank offering a higher rate but possibly with a higher minimum balance. If you are looking at shares, mutual funds, and the stock market, you must study the stock market to know the basics of the trade including methods of selecting stocks. If you have a thorough understanding of the stock market, you will be in a better position to assess risks and make an appropriate selection.
Find your risk tolerance: It’s a given that all investments come with varying proportion of risk. You need to assess your risk–tolerance. Find your own comfort zone. Create a portfolio that contains well-researched holdings which correspond to your goals, time, and risk tolerance. Are you comfortable with the current market value of your investments going below the cost value? In simple words, it means you are comfortable going for a loss even if it is for a temporary period. If not, then you should stick to guaranteed return investment products such as fixed deposits, where the principal and the interest are always protected. If you are an investor, who is comfortable with bearing notional loss for a short period of time, your job doesn’t end. Are you okay with a 10 per cent loss? Or, you can sleep at night even if your investment declines by 50 per cent. Answering these questions will help you understand your risk profile and tolerance.
Diversification is key: A great savings tip or investment tip is to diversify your portfolio in order to reduce the risk. As the adage goes, do not put all your eggs in one basket, similarly, do not invest all your funds in one particular type of savings instrument. Mix a variety of investments. A single investment poses a higher risk compared to a portfolio of different kinds of investments, which may yield a lower risk on an average. In case of a loss from one investment, diversification helps you recover the loss from another investment. Not all assets behave in a similar way at a given point of time, so, a great investment tip is to have a combination of assets through diversification. This ensures that you are constantly hedged against all sorts of risks.
Minimize tax: Apart from savings, another goal of your investment should be to get tax benefits. Choosing the right account to carry the right kind of investment can help you cut taxes. For instance, there are investments, whose gains are taxed by clubbing it with your income. So, if your income goes up, the applicable tax also rises on such investments, even though your gains may be small.
Another savings tip is to calculate the post-tax returns on your investments. For instance, if you have a huge amount as a fixed deposit then you will fall under a particular tax slab. Calculate then if keeping the fund in FD is more beneficial to keep it in tax-saving mutual funds.
In India, investments may be taxed at investment stage, growth stage and maturity stage. So, you should compare all the investments on the overall tax outgo according to the different stages.