Sunday, December 16, 2012

I Was Recently Reading About It


Why? When? Where? How?

Congratulations..!! We passed the college and,
Congratulations..!! We are the earning crowd now.

These days the word we hear a lot, yes of course apart from "work" is "Investment". We have already bought most of the reasonable things, and also few of those unreasonable things we wanted. These days almost everyone has at least 25% of their salary left in the bank account at the month end. Its great if you have more then 25%, not so great if you have it much much more.  Maybe then you don't understand the point of earning money. But still no issues. Its your money.

Lets comeback to the actual topic: Investment. We are particularly naive to this field. Too much influenced by the western culture. No responsibilities, lot of money, and far too many ways to spend it and have fun. In the following paragraphs i'll discus about all the new things you can do with your money, as in Investment.

Investment is not always putting your money in share market. It is a general term, its any thing where you put your money. No keeping it in safe is not an investment.

Why do we need investment?
Believe me, if you start counting there is a hell lot of reasons. I have listed few of them:

  1. Too much money: Yes, for people who earn far too much, thus save far too much. Lets just say, save far too much.
  2. Higher Studies: Yes, this is my reason, one and only reason and far too expensive one.
  3. Retirement Funds: But why? We just joined, retirement is too far away.
    1. Because time flies and retirement is always too far away till the time you have 5 years more to go.
    2. Because eventually you will have too many responsibilities to fulfill then to save for retirement funds.
    3. Because you don't realize the power of compounding.
  4. Emergency Fund: I know most of the companies provides Medical insurance, Life insurance, accidental insurance for their employees. Its nice because it covers most of the emergencies when we need money on shorter notice. Its great if yours is one of them. If not, go ahead, get one of those insurances ( no, I am not taking about a new company ) for yourself. Its always a good idea to set aside a fund to cover up unexpected expenses. Reasons include:
    1. Because the rates of interest in personal loans are too high.
    2. Because who knows maybe you'll have to travel abroad.
    3. Because you job is not as secure as you think.
  5. A house: Yes most of the people, including me wants to buy a house eventually.
  6. Vacations/ Luxuries/ Car: These are the short term investment goals, but then again requires an adequate amount of money.
  7. More options/ Choices: Maybe you'll decide to open a new start up.
Maybe all the reasons above wont apply to you but then too it would have helped to understand about the essence of money.

Why? When? Where? How?

I am glad you have decided to read further.
The best answer to when to invest is. ASAP. Yes, as soon as possible. Money flies. Its common tendency to spend more when you have more money in your bank account. Few days earlier I noticed that the amount of money I am spending on Coffee these days is lot more then the amount I used to spend on food back in college. After all its your money. The more you sooner you start saving, the more easy it will be to save when you have lots of responsibilities.

Why? When? Where? How?

The point of investment is getting the maximum return from the amount of money with the involvement of minimum risk.
Now here comes the interesting part. Once decided that we want to invest,  also figured out that we want to start investing right from our January pay cheque. Where to put the money is the biggest decision.

In my opinion there is no single correct answer. It depends on your requirements. In today's world there are a lot of options for us to put our money in. I wont go into the technicalities as it would be a what we say an over head transfer  for most. I'll go through the basic details of  the products and how the kind of investment product vary with our requirements and how long we want the money to be invested.

We need our money back in generally three time frames.
  1. Short term : That is upto 3 years,
  2. Mid term : Upto 5 years,
  3. Long term : More then 5 years.
There are basically two thumb rules:
  1. High risk, High gain : This is pretty obvious. You'll have to choose your portfolio ( the investment products you want to put your money in ).
  2. Diversification : As its commonly said, never put all you eggs in one basket. Its never a good idea to risk all your money on one.
Depending on when do we need that money, how much risk you are willing to take, money can be invested in different kind of investment products. We can take more risk when we are younger then when we are older. As you grow up move towards a non riskier portfolio. 
Young age --> More risk taking capabilities --> More equity funds.
Older --> Decrease risk taking capabilities --> Debts/ Bonds.

The case with long and short term investment is opposite. When we invest for short term, the amount of return on a particular sum of money is not significant and the main motive towards investment is to save the sum from getting spent. Also when invested for short term, the return on a higher risk portfolio is not much different from the low risk portfolio so its always good to take the minimum risk way. Fixed deposits, bonds are some of the low risk investment products. No saving account doesn't count. It gives 4%, even inflation is higher.

The scenario is different when we go for long term investment. We can very well have a some equities in our portfolios, these equities may not perform good in the short run, due to market correction, inflation and a lot of other reasons but in a longer run, an average portfolio consisting of equities gives around 15% p.a of return that is much higher then what debt securities, that is FDs and bonds, will offer.

 Why? When? Where? How?

Congratulations..!! of course to me, I have convinced you to at least give a thought about investment and saving, and to you, this is the decision you are never going to regret.

How part is no such big of a deal if you have figured out the above three points. Its more or less a decision similar to of paying by cash or card, you have already decided the product, you have negotiated the cost and just payment is remaining.

There are a number of ways to invest. I have listed few of them and again I wont go into the technicalities:
  1. Fixed Deposits/ Recurring Deposits/ PPFs : More or less this is similar to US treasury funds. Lowest risk, and lowest returns.
  2. Metals/ ETFs: This is about investment in Gold, Silver and other precious metals and commodities. There are two ways of investing in these:
    1. Physical form: Where you purchase them in physical form, as in gold/silver coins etc.
    2. ETFs: Electronically Traded Funds where the above commodities are sold in paper form. The good thing about this form is that it is liquid money, we don't have to bother about their safety and can be easily converted into liquid money.
  3. Real Estate : Buy land. They are not making more of it. By far this guarantee the best return but then this is not liquid money ( the money you can convert in cash in a short time ) and also getting into Real Estate requires a lot of initial investment, down payment and lots of paper work hassle.
  4. Mutual Funds : Investing in Mutual Funds is similar to investing in multiple equities ( shares ) or say multiple investment product at the same time + hiring an investment manager who will do research and invest your money. Is this the best way?
    1. Yes, if you don't want to learn finance and want to give all your saving in a person hands who says he know how to invest, and also when you want to give a part of your return as a fees.
    2. No,  for all other reasons.
  5. SIP ( Systematic Investment Plan ) : This is just a way to invest in Mutual Fund, but a very popular one. It is investing a fixed amount every month on a particular date.
    1. Pros: Since it is regular investment over a period of time it averages out the market movement and corrections. When the market is low we can get more units of the same product because the product will cost less at low times. Better return then debt funds.
    2. Cons: Again the above, you cant decide when to invest, you don't exactly know where your money is invested.
  6. Direct Investment: This is the way to directly expose your money to the investment products without any middleman involved.
    1. Pros: Returns are completely yours. Research is yours. You completely know where your money is.
    2. Cons: The losses are also yours. I have never mentioned in the above statements that all these information will give you a control on your losses.

      I wont suggest anyone to go for this method unless and until they are ready to spend some time to learn the fundamental rules of finance, but believe me, no one is as smart as you are, there are a number of ways of analyzing the stock market. Value investment ( Warren Buffet's ), Fundamental analysis, Technical Analysis are few of the popular ones. 
I would also like to add few more points:
  1. Out of the twelve months saving, put one month's saving into different kind of insurance plan. Its necessary.
  2. Always remember to reinvest the interest and dividends, this will enable you to enjoy the power of compounding in few years.
  3. Take account of the inflation.
  4. Divide your investment on monthly/ quarterly basis.
Happy Investing.

PS: Spending is equally important, One reason to save money is to enjoy it. Life as a miser today and as as a king tomorrow doesn't work. Tomorrow never comes. I read somewhere that if you don't spend 20% of your earning on the things you want, you don't understand the point of earning at the first place.


  1. Hi Aman,

    Thank you for a very informative post. Can you suggest me a few sources from where I can understand the basics of investment and tax-saving better? I have just graduated from college and want to improve my understanding of the subject.


    1. Hi,
      I am extremely sorry that it took me so long to reply.
      If you want to learn finance inside out I would recommend reading "Options, Futures and other Derivatives" by JC Hull but I don't think you will be that much interested in it.
      What you are interested in is, smart investment. A way to help your money grow. For the course of this answer i'll assume you are from India.
      I will not repeat what I said in the post above as to decide what kind of investor you are ( Short term/ Long term ) and the risk taking potential. That depends on individual basic and you can figure out on your own.

      For learning about the current investment scenarios in India there are a couple of websites I refer to one of them being
      This will more or less help you identify which places to put your money in, once you are through with the decision making process.
      Quora is a big source of this knowledge too.
      Another website I will suggest you is this is a website that will not only teach you how to save money but also how to spend your hard earned money in ways that will make you satisfied and happy.

      Thanks a lot,

  2. This comment has been removed by the author.

  3. I have just started my job. Whatever i read in the articles, i found for saving and investment, i can go for PPF and term plan and some medical insurance and also i can invest in shares. Is this a good idea?
    My father is telling me to have a endowment plan where i need to pay 30k half-yearly. I found on internet, its not a good choice. But, he is concerned about return, which is pretty good. How can i convince in normal terms (not economic terms) that its not good idea.

  4. Hi Vivek,
    Its great that you are thinking about investment right from the start of your career, you'll soon realize the power of compounding.
    You have mentioned very diverse fields of investments above and its awesome that you have done your homework in researching about them. A normal investor's portfolio is a mixture of the above all.
    See, investment is all about saving your money for future so as I mentioned the most important aspect is when do you need this money back. So if you need the money after a short period of time go for Fixed Deposits/Bonds as there is no risk involved, but when you're planning for long term you can take risks and invest some money in shares and derivatives ( these are a whole lot of other things like options, futures etc derived from a particular share ).

    Term plan and Medical Insurance plan are Insurance, I am glad you thought about it. Its very important to get insured. Medical insurance you should get as early as possible but cross check with your company as most of the companies do offer sufficient medical cover.
    For term plan, what I suggest people is to wait till they get married but it depends. The whole point of insurance is that if something happens to you, someone who is dependent on you, can survive. What I feel that in most of the cases, there is no such dependency on us till we get married or have kids. Another thing is that most of the good term plans available in the market are for a period of 25 to 30 years so if you take a term plan right away it will finish off when you're around 50 year old. Plan that finish date around the time when you think you're done with your responsibilities or when you think you would have saved enough that your family can survive.

    As far as endowment plan is concerned, I don't have much idea about them but you can convince your father saying that you are planning for a real long term or maybe you can invest 10 thousand a month for an year or two or let the return on investment decide.

    Thanks a lot,
    Aman Raj

  5. Thanks for your valuable siggestions :)