Understand 3 investing basics to become successful investor

People around us have told you and me to study well, score good marks, get place in good company,

Once you got a job, they think you’re pretty good to carry on your life,

That’s fair, but have anyone spoke you about how to handle the money, grow the money, and make it work for you,

At the end of every month salary is credited in your account,

We would have got some free advice from parents to start saving somewhere, start RD, don’t keep the money in the hand itself, you may end up spending unnecessarily,

Personal money management is one of the important life skills which everyone needs to know,

Unfortunately, no schools and colleges have taught that,

In this post, you’ll get familiar with the most essential investing basics, which will lay the foundation for your investment journey.

investing basics

Main difference between saving and investing:

If you’re a depositor in a bank, you will go to the bank, will opt for a fixed deposit or recurring deposit,

Banks will offer you a fixed rate of return (X%) based on your investment horizon,

It may be (5-6%) yearly rate of return,

Then you sign the relevant documents, deposit the money, Job done.

For the time invested, you get the fixed return, which is pre-specified in the document.

This is saving which we all are very familiar,

But on the other hand, if you invest your money, it will grow exponentially over time.

What do I mean by Grow here?

Understand with this analogy,

I remember, before few years my parents have sown some seeds and planted small trees at the back of my house,

Now I can see quite a lot of trees and plants have grown taller, with a lot of leaves, flowers, and fruits in it,

At the same time, there is one small guava tree with significantly fewer leaves, and no fruits have grown in it,

This exactly applies in investing,

You will never know which plant or tree will grow well,

But based on some factors, you can understand how things might turn out,

Weather, proper sunlight, pest attacks, soil support, are few things need to be figured out before planting a tree,

Like that investing in the Stock market, mutual funds has it’s own risks, but understanding it before investing is very important in your investment journey,

The more you educate yourself, the less you get panic in the future,

Bottom line: Saving is like storing seeds in a box; investing is like sowing seeds in the ground.

The Power of compounding:

A few days back, I was going through the fixed deposit document of my parents,

At the time, my mother was quite concerned and told before few years money used to double quite earlier than now,

Banks used to offer higher rates somewhere around 9.5%,

Those days are goneā€¦..

Today the same bank is offering is (5.5-6%) for a 5-year term deposit,

Do you want to know how long your invested amount will take to double without using a calculator or excel sheet,

How to double the money?

Heard of Rule 72?

Just divide 72 by the interest rate of what the bank is offering,

The answer tells you how many years it will take to double the money,

For example,

Scenario 1, Conservative mindset:

Assume bank offers 6% per annum,

You are depositing Rs.100,000 at the age of 25,

rule of 72 example

Just by doing simple math, we figured out it takes 12 years to get double the money of invested amount,

The calculation is straightforward, 72/6 = 12 years,

There will be a change in interest rates in the future,

This example is just for understanding purpose,

I’ll give you another scenario to make the picture more clear,

Scenario 2,  Less risk-averse mindset:

By looking at the long term statistic,

I’m assuming Equity Mutual fund, on average, generate 12% CAGR(compounded annual growth rate)

You are investing the same Rs.100,000 in equity mutual fund at the age of 25,

rule 72

Here the money is getting double every 6 years, whereas in scenario 1 (12 years), you have to wait 6 more years there to double,

Math is 72/12 (Which we assumed as return from equity Mutual fund)

Two key differences from scenario 1 and scenario 2 are,

In scenario 1 you get 8Lakhs at the age of 61, whereas in scenario 2 you get that same money much earlier at the age of 43 itself (18 years difference)

Time invested is the same in both scenarios, but see the difference in the growth of money  64Lakhs in scenario 2 and 8L in scenario 1. (56 Lakhs difference).

This is the Power of compounding!!

Bottom line: When you allow your money to grow by investing, you will reap great returns in the future for what you sow in the beginning.

the power of compounding
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Scenario 3, Cost for the initial delay:

In this scenario, you are investing the same Rs.100,000 in equity mutual funds, but at the age of 31,

Maybe you thought to delay it for some reasons,

how to double the money

Everything is the same as scenario 2 money gets doubled every 6 years,

Since you have initially delayed 6 years, you deserve to get less than what you got in scenario 2, right?

Don’t be shocked to know that,

The cost for delaying 6 years is 32 Lakhs, 

The delayed time may look less, but the magnitude is very high,

Compare for the respective years as well. You will end up getting only half the amount.

Since you waited for a few years, the effect of compounding has started late, which in turn reflects in returns.

Bottom Line: If you’re yet to start investing, better late than never, educate yourself, and step up the game as early as possible.

personal money management
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Goal-based investing:

This  is another crucial element which you need to figure out to kick-start your investment journey,

Imagine for a moment you’ve plan to do a master degree/specialization course in the future,

The next question would be what you are aiming for and how much will be the expenses for that,

Another essential thing to examine is within how many years will you be doing that,

Based on these expectations, time horizon, you’ve to set up an investment plan to achieve the goal,

This is just an example,

Different people have different plans,

Like buying a home, car, exotic vacation plans, marriage, family commitments, and the list goes on.

Make a plan accordingly,

I’m pretty sure if you have a decent fund in your hand, you can execute the plan smoothly in the future,

Bottom line: Investment should always be focused on goals which in turn makes you disciplined and patient in your investment journey.

goal based investing
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Conclusion:

Once you’ve spent enough time on understanding what you want to achieve by investing,

To be honest, the half battle is won,

If you’re an early-stage investor, make your belief system updated with these investing basics,

Keep learning!!

Happy investing!!

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