This will be a multi-part post covering the basics of investing, from the why and the how of investing, to what to expect from your investments.
No prior knowledge of investing should be required to understand the concepts.
Let's dive right in.
Why should you invest?
There are two main reasons:
- To protect the purchasing power of your money against inflation.
If you keep your money idle in your savings account @4% per annum interest rate when inflation is 7-9% per annum, your money, even though it increases in absolute terms, actually becomes worth lesser over time.
What cost Rs 100 last year now costs Rs 109, but your money has only grown to Rs 104. Overall, you have lost purchasing power by keeping your money in your savings account. Keeping up with inflation is one of the most basic requirements when it comes to our savings.
- You are not going to earn forever.
You need to save and invest now, so that you can support yourself when you are old and no longer have a job.
Just saving without investing will leave you with a very small retirement fund, thus forcing you to either retire later than you would have liked to, or to have a substantially lower lifestyle in retirement.
Apart from retirement, you might have other financial goals too that might not be achievable just by saving and no investing.
Okay, so now that we all agree that we need to invest in order to secure our future financially, the next question is what should one invest in?
Instead of discussing any specific recommendations, let us look at all the possible options we have and develop a way to think about them.
What can you invest in - Asset Classes
Broadly speaking there are 4 investible asset classes:
- Equity or Stocks
- Real Estate
- Commodities like Gold
Each asset class has its own typical risk, return and ownership characteristics which is exhibited by all investment options under that asset class.
For example, all real estate investments tend to be illiquid i.e. they are not as easy to buy and sell as stocks or gold. Also, when real-estate does well, then most real-estate investments tend to do well.
This is true for all asset classes - investments within an asset class tend to behave similarly. Hence, it is very useful to study the investment asset classes themselves before studying individual investments.
In the next part, we will go over all the asset classes one by one to understand each of them better, so that we know what to expect from which one.