Risk vs Reward – Every investment carries some risk. Higher rewards/return often comes with higher risk. Nothing is free, everything has a cost.
Compounding – If returns from investments are reinvested again, then compounding takes place. Compounding will simply grow your money quickly.
Time period – You can keep on investing for next 5 years, next 10 years or even more. Few investment options have high volatility in the short term. Investing for a longer period can handle those volatility without any issues.
You should choose your options on various factors like these. Do not worry, we are going to make things simple very soon.
It is usual to get overwhelmed with a lot of information present there on the internet and other sources around investing. A lot of investment instruments, a lot of choices, a lot of opinions around investing… This might be too much to handle.
What are some interesting ways that we can invest to grow our money?
Let’s look at some great options below.
- Treasury Bills & Treasury bonds.
- Corporate bonds.
- Index funds
- Mutual funds
- Direct Stocks
- Real estate
Treasury bills are short term debt securities issued by the government, typically have a maturity period less than two years. Treasury bonds are issued for the long term. Treasury bills and bonds are the ways in how you lend money to the government. Investments in treasury bills and bonds are stable and safe. The risk is less and the returns as well compared to mutual funds or direct stock investments. If you like to invest your money in a less riskier option and for a short term, then choose treasury bills. For a safer and long term plan, choose treasury bonds.
A corporate bond is issued by a company to raise funds for its operations or expansion. When you buy a corporate bond, you are essentially lending money to the company. In exchange, the company will give you regular interest payments and the return of your principal when the bond matures.
Index funds are a great option for investments. Index fund consists of shares of all or a subset of companies listed in the market.So index fund will mirror the market’s performance. So you don’t have to worry about individual stocks too much if you are investing in index funds. No fund manager is required to actively maintain these funds. In this type of fund, the fund manager does not have any work such as analysing, bringing in, selling out or reallocating individual companies’ shares based on their expertise and find’s performance. Investment in index funds is suitable for long term investors. Index funds give higher returns than other investment options. Since an index fund mimics the market’s performance, the volatility will be high in the short term. It would be sensible to stay out of index funds if you are looking for amazing returns in short terms.
Mutual fund is an investment fund where a fund manager or a team selects a mix of stocks, bonds, or other securities based on a specific investment strategy. A mutual fund does not need to be always a mix of stocks and bonds, it can be composed only with different stocks or it can be only with a set of fixed investments like bonds and bills as well. Also mutual funds have higher fees than index funds since these are actively managed by a fund manager.
How volatile, how much riskier or safer a mutual fund depends on what it is composed of and in which percent. A mutual fund with 30% allocation in stocks and 70% allocation in bonds is much safer and less volatile. But a fund with 70% allocation in stocks and 30% in bonds or any other fixed instrument is relatively a bit riskier and much more volatile. The first fund will give you more returns over a long period of time compared to the second fund we discussed above.
Direct stocks refers to investing in stocks by buying and owning stocks directly rather than through a mutual fund or index fund. You have complete control over the shares you bought. When you buy a share, you own a small part of that company and may have voting rights on major corporate decisions as well.
Share price of a company depends on the company’s performance, future and peoples’ perception. Your investment’s returns are decided by how the shares of the companies you have in your portfolio perform in the share market. A share might give returns in two ways, the value of the share price increase which we call capital gain and some companies pay regular dividends if the company performs well. Do not time the market because it won’t work, make a habit of investing regularly.
Also here you don’t have any fund management fees, because you are the fund manager. There is relatively higher risk associated with the direct stock investment approach.Also note that investing in a few stocks or stocks of the same type of companies can leave you exposed to high risk if those companies perform poorly. You have to invest not only money but time as well to research and analyze companies before buying shares. Don’t buy shares of a company because someone recommended to do so, do your own due diligence. Direct stock investment is great for you if you have an appetite to take high risk, willingness to spend time researching companies and looking at a long time horizon. Fees for fund management or transactions can erode returns. Choose low-cost options where possible.
Alert: Trading is buying and selling stocks within a short time to earn profit(and loss). Trading is not an investment but gambling. It is strongly recommended to stay away from trading. A lot of people end up with loss and stress due to trading in the market. It is not worth it.
Finally, let’s talk about real estate. There is a reason why real estate was at the bottom of the list. I believe investing in real estate is not a good idea. Typically annualized returns in real estate are less than the returns from other investments we discussed earlier. Also do not for less returns, most of the people get into debt as well by obtaining a loan. We should consider all the expected costs associated with the property as well when we calculate returns, not just buying price and current value of the property or the selling price. For example, think about costs like repair and maintenance costs associated with the house, set of fees when buying and selling a house. You might have a different view on this topic, but think again whether investing in real estate is really worthy or if it just appears worthy but not really.
Diversification
Diversification helps to reduce the adverse effects due to poor performance of one or few investments in different assets or shares. Don’t put all your money in the same type of investments. Try to diversify across the different investment types. For example, have 40% of your investment in mutual funds, 10% in stocks and 50% in treasury bonds. Find the right balance of mix for diversification. A young investor who has a long term mindset can allocate more percentage in stocks, both direct and/or through index or mutual funds.
Simple yet powerful words on investing
- Share market fluctuations are normal. Don’t panic and don’t get emotional.
- Your returns from investment should beat the inflation. A normal savings account won’t do it.
- There is only a small line between taking calculated risks and taking stupid decisions. Don’t fall on the wrong side.
- It is not necessary to look into your investments everyday. If you have made correct choices, then the investment will take care of itself.
- Never borough for any personal investments.
Remember making investing as a habit will help you grow your money and build wealth. Also it helps to achieve financial independence as well.
The Best Time To Invest Is Now.
