The greatest personal fortunes created in the world and per say in India were not created in a fortnight, it takes years of hard work and in order to experience the power of compounding, one must start investing early and consistently. The greatest investor of all time Warren Buffett bought his first stock at the age of 11, and regrets that he didn’t start earlier!
Investing your funds is the smartest way to make money do the work for you. As in, while investing your money the only task is to do your background work or due diligence on the specific asset/security and then let compounding do its task. One of the most basic ways for a beginner in the field of investments is to invest in the stock market through mutual funds.
Investing and learning the art of making money might seem too “adultish” for the Gen Z at this stage of their life, but to make wealth through investing, one must start early. The 101 to making the right investments is to first invest in yourself, perhaps the biggest investment one can ever make. A lifelong learner is also a lifelong earner!
One needs to understand their goals, risk appetite, estimated ROI they expect and the period in which they want to remain invested.
Mutual funds have various types: Equity Funds, Debt Funds, Hybrid Funds, ETF’s. Some companies include Axis Asset Management Company Ltd., Aditya Birla Sun Life AMC Ltd., BNP Paribas Asset Management India Private Limited.
Examinations such as NISM and NCFM also do help in educating one about personal finance and investments.
NISM-Series-XVIII: Financial Education Certification Examination
NISM-Series-XII: Securities Markets Foundation Certification Examination
The above-mentioned exams can help in learning about the basics of finance and the various types of securities traded.
One formula that I feel is very important in investing is that: Income – Saving= Expenditure.
The formula taught to us mostly about savings is Income less expenditure, whatever that remains must be saved, but the reverse of that is what is required to attain financial freedom. After getting your income, keeping aside a part of it first (saving) that is later used for investing and then spending the rest of it is what smart people do.
Diversification and asset allocation are the two key tools for investing smartly and minimizing risk.
Diversifying your portfolio into various asset classes not only increases your probability of earning more, but also increases the chances of losing less! For example: Having precious metals such as gold and silver in your portfolio along with equity stocks acts as a very good hedge, because gold and silver tend to perform better when the equity markets are not performing well.
Investing again can be of two types active and passive.
Active investing is where you put in the efforts and time to research and find investments and you invest for yourself. More work, more risk and more potential for rewards. Being an active investor, the aim is to make life changing multibagger returns and sometimes also to outperform an index. This is the true sense of wealth creation. For this one need to dedicate themselves full time and must have a lot of patience.
Passive investing on the other hand, the risk is less, and the returns can somewhat match the index. Here getting 2x, 3x returns are somewhat difficult. Passive investing is where you let mutual fund houses handle your investments. It is more of a hands-off approach which gives moderate returns. Here outperformance is not the goal, here to make moderate returns and to beat inflation and to get better returns than an FD is the goal.
Two approaches to investments are value and growth investing.
Growth investors seek companies that offer strong earnings growth while value investors require companies that are undervalued in the marketplace.
Growth Investing: Growth stocks refer to those that have shown better earnings in recent years and are expected to continue to do so. Sometimes also referred to as multibagger stocks, emerging growth stocks are those that have the potential to achieve high earnings growth but haven't done so in the past. Sometimes investors become highly bullish on these stocks and are somewhat ready to pay a premium on the price, so usually these companies are priced a bit higher than the broader markets. According to me, these stocks continue to do better than their peers and the economy even during a period of economic slowdown. These stocks are volatile sometimes, as the expectations are built up on the street and if estimates are not met even during one quarter, a pullback in the share price can be expected.
Value Investing: Value investing is a strategy where you pick and invest in stocks that are trading at a price lower than their intrinsic/book value. In short, value investors invest in those stocks that are undervalued, and which are ‘underestimated’ by investors.
These stocks are lower priced than their peers and the broader market and carry somewhat less risk than the overall market. Some well-known value investors are Warren Buffett, Benjamin Graham, Charlie Munger to name a few. They mainly believe in the concept of “Margin of Safety”, which is the core of value investing. Margin of safety is the principle where an investor only purchases a stock/security when their market price is significantly below their intrinsic value. This not only provides the investor with a head start before other investors, but also the confidence in holding the stock for a considerable period.
Now, Growth or Value?
This has been a debatable argument for quite some time, where statistics of both types have been presented and debated about.
Growth stocks are aggressive in nature and have the potential to perform when earnings are good, and when inflation is not a cause of worry. Value stocks on the other hand tend to perform well in cyclical sectors such as metals and real estate. Metals were the first to recover from the March 2020 fall and have started to lag somewhat now. These are perfect environments for value stocks to perform and are cyclical in nature.
So being an investor, having a right mix of value and growth stocks is required, again this being a part of asset allocation which depends directly on your goals, risk reward ratio and the time frame.
Divide your demat account into two parts: Active and passive portfolio
The active portfolio being the part where regular buying and selling of securities will take place. Taking advantage of short-term volatility to make profits.
The passive portfolio is the part where investments will be made for long term wealth creation, and where the time period is more than 1 year.
Being a beginner, it is very important to understand that discipline and focus are very important to make it big. One will always experience greed and fear on a regular basis in the field of the stock market, hence it is very important to understand that you need to have control over fear and greed and not the other way around.
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