What is an Investment? Investment Basics For Beginners.

What is an investment? Why it is important to do investment?

A person who wants to start investing money should be aware of some basics principles or terms that will always light their direction towards a better decision. Hence, the first thing to keep in mind while investing is to remember “piled up money in a bank account is more admirable, then making a wrong investment decision.”

In childhood, we always loved to play our respective games or sport. Just like every sport has its own rules, investment also has a set of its own. It is always a “set of right investment decisions” which makes a person a successful or unsuccessful investor. So, let’s start scratching all those small tools about the process of investing that should be kept in mind.

What Is an Investment? Why Investment.

In the layman language, it is the process of investing money for profit. Hence, the process of buying goods that are not being consumed today but will be used in the future to create more wealth by selling them at a higher price to earn the difference.

Why Investment?

It is really important to understand keeping money with self doesn’t yield a high return. Money kept in saving account can yield you 3% to 5% at most. While making an investment one sacrifices his current comfort for future comfort. Hence, the risk is there. But a better investment decision is the only mode where you can have a higher return for your sacrifice.

By investing money one puts their money to work.

It Is a Process You Need To Understand

We often focus on getting wealthy as early as possible but don’t focus on the process. If you want to be a successful cricketer like Sachin, you need to get familiar with the entire process. Therefore, the process of investing is as follows.

Steps of the investment process.

STEP 1: You Read about it-

Before taking any decision, you need to learn more about the opportunities that can be generated from your investments. Reading more about the topic that you want to make a decision, gives you an upper hand while taking a decision on it. 

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STEP 2: Get to know the Process-

The more you understand the process, the better you become at it. Just the way stretching your brain muscles makes them stronger similarly stretching your investment knowledge makes your strategies stronger.

STEP 3: Set your Investment Limits- 

Before making any investment always remember, "Better the understanding, more the accuracy" with which one can frame the rules. Better observation is what differentiates a good investor from an unsuccessful one. By having good knowledge you can set the investment frameworks that work for you.

STEP 4: Take the Decision Accordingly-

Once you are aware of every aspect, you can take better decisions that will contribute towards your end goals. Hence, your observation and the way you frame your limits make the whole difference in the long run.

STEP 5: Get Return-

Returns refer to the gain on the investment made. Better the decision better will be the chances for more success.

STEP 6: Experience-

As time crosses by, you start getting a return on your investment, which not only helps you to reinvest it but also enhances the size of your expertise which further adds to one's learning.

The first step of becoming a strong, active investor is to understand how important good knowledge is. The second step is wanted to learn it. Finally, you have to practice those budding investment skills.

Things to know while investing. 

Regular Investment Is good whatever the amount be.

Investments do not require a very big amount. All you need is to put aside regularly whatever amount you are comfortable with to meet your future financial goals. What’s important is that you start investing or saving regularly as small as Rs100 to as big as Rs10000 and furthermore.

To get a good return on your investment you can regularly invest in SIPs i.e. Systematic Investment Plan. Various types of SIPs are available in the market.

SBI blue-chip funds, Aditya Birla sum lifesaving funds, etc.

Benefits of regular investment.

Power Of Compounding:

The "power of compounding" is something that even Warren Buffet suggests people to understand before starting their investment journey. Compounding is the process of reinvesting on the principal amount including the interest amount at the same rate of interest. It adds the profit back to the principal amount and reinvests the entire sum on the annual basis to accelerate the profit earning.
From the following, you can understand the process of compounding.

Rate of return per rupee over a period of time.

If you invest Rs 1 it will grow by 38.34 times in 20 years at a return of 20%. Similarly, if you invest Rs 1 it will grow by 237.37 times in 30 years at a 20% return.  

Higher Rate Of Inflation.

Before going to make any investment, one should take into account the existing trend of the inflation rate in the market.

Inflation rate- It is the percentage rate at which the prices rise over time, resulting in a fall in the purchasing value of money.

Currently, the inflation rate is 7.35%. Hence, the return on investment must be more than 7.35% for the last 10 yrs. Therefore, the higher the difference in rates more will be the return on investment.

Pay Yourself First.

“Pay yourself first” is a very interesting concept that I came across while studying RICH DAD POOR DAD by Robert Kiyosaki. Pay yourself first is the theory under which you pay a certain margin of your income to yourself, that you, later on, invest far more effectively to buy good assets. This habit of paying yourself transformed the lives of millions till now and many more to come.

Start Early.

Whenever does someone starts earning they always think, what is the best age to start investing?

Well, before start investing one needs to realize that it is not a one-day thing. It is more of a habit. As it is said, good habits pay off, investing is also one of those rare good habits that pay off at a later stage.
To meet a bigger financial goal, one must start investing early. As we already studied the power of compounding gets boosted when multiplied to several years. Hence, the number of years the investment is being held higher will be the return.  

Explanation of the facility of compounding.

For example:
To meet the financial goal of 1 Cr. on your retirement at the age of 60.

Starting at 25 age: to have an amount of 1 Cr. on your retirement at the age of 60 you have to pay 680/- rupees monthly (assumed return 15%).

Starting at 30 age: to have the same amount of 1 cr. at the age of 60, you have to pay 1500/- rupees (assumed return 15%).
Therefore, longer the amount stays invested higher the return it brings back to the investor. Hence, start investing whenever you can, however small or big the amount will be.

Eliminate Your Debts First; Else it Eliminates Your Freedom. 

One of the key factors that govern the wealth of a person is the amount of debt he has. Whenever you have money and you have to choose between paying for an investment or costly debts, always choose the debt. By paying your debts you choose freedom rather than stepping into a cage of the financial burden.
What can be the types of debt that you should pay off before thinking of investing?

Secured Debt:  this is the kind of debt backed by an asset for a collateral purpose. In case you failed to pay back the amount, a particular asset can be sized and resold to recoup the funds. Example: housing loan, educational loan, gold loan, car loan, etc. The bank charges less interest rate on these loans because it is secured in terms of payment.

Unsecured Debt:  not backed by any collateral asset. These debts generally accompany a heavy rate of interest. Example: gym membership, medical bills, credit cards, personal loans, etc. these sorts of loans carry a heavy rate of interest. Hence, one should pay it off as soon as possible before making any investment.

A life without debt is far more attractive than a leisure life with debts.

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Keep Building Your Assets.

I believe one should keep hustling in their daily lives and whenever we have a chance we should always keep building our assets, active or passive. The more you practice, the more experience you gain that ultimately results in a better result.

There are many different ways you can start investing your money smartly.
Do you think the same? What it can be? 

Must Read:

Top Investment Options With High Return in India


  1. Thats some high level commerce. But its good to have knowledge. Great work!

    1. Haha not high level commerce, just basic financial information that every youngster should be aware off.

  2. It is very important for every person to know, you explained in very good detail
    good job.

    1. Thank you so much.
      Financial education series just got started much more to come yet.

  3. Very knowledgeable content saryu!!!

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