Introduction to Basics of Investing
There can be multiple parameters based on which we choose our investment strategies. A well-thought-out approach would assist you in achieving your financial objectives in the most efficient manner possible. For any arena of life, we can have a strategy, for example, the choice of your career could have a strategy, or students could have a strategy on how to score more in an exam. A well-planned investment strategy is a guide to your success as an investor.
The following criteria should be used to develop an investment strategy:
- Your Risk appetite
- Goals
- Time Period of Investment
Your investment strategies will differ depending on each of these parameters.
Importance of Knowing Yourself
Knowing yourself is very essential before investing and is the first step before investing. The following parameter can help you to understand yourself.
Age
If you are younger in age then your risk-taking capabilities are higher but if you are at an old age, let's say 60 or 65 then you should find safer options for investment as your active income from that period of time can be quite less than that in your younger age.
Time Period
If you are planning for long-term investments then equities can give better exposure than debts.
Equity Funds: Equity funds invest mainly in the equity trading shares of enterprises and associated assets, such as derivatives (i.e. future, options).
Debt Funds: They focus their investments on debts and money market instruments which include government bonds, G-Secs, non-convertible Debentures, etc.
No. of Dependents on you
You should also consider the people dependent on you. If the number of dependents is more, then your risk-taking abilities are reduced, but let's say if you have only one dependent on you then you can go for higher-risk options.
Income
You should also consider your income profile. Is your income fixed or unstable?
This the question you should ask yourself. If your income is fixed then risk-taking capabilities are higher.
Risk analysis
There are three types of risk:
- Conservative
- Moderate
- Aggressive
You should choose your risk profile depending on the three categories. There is a direct link between the risk taken and the returns. Higher risk gives higher potential returns and due to this the risk trade-off comes into play. If your risk is lower then the potential returns are also less. As an example, the investment in FDs is lower risk and low potential return investments.
When you move to the top of the risk trade-off your potential returns can be larger. A possible example is the investments in small Caps with high risk and large returns.
with that understanding of the basics of investing let's discuss the best investment strategies that you as a beginner in investing can choose.
Value Investing
Investing in stocks that are currently undervalued: In simple terms, Investments in stocks in which the current value of the stock which is known as intrinsic value is lower than its current market price. It is a 'buy right and sit tight' strategy where the investor has to wait for a certain period of time after the investment is done on a proper stock. The focus of value investing is to try to find stocks available at a discounted price in the current market.
Growth Investing
The second strategy is the growth investing strategy which includes investments in stocks that are having very high growth in terms of its:
- Revenue or,
- Profitability.
Now to analyze whether the stock is having high growth or not you have to compare it with its competitors or with the industry average.
Let's say a company is having a little higher market price as compared to its intrinsic value but has a brilliant growth rate then you can consider giving it a look.
In these investments, the focus is on higher-growth stocks, for example, it could be mutual funds that are investing in high-growth stocks. In these stocks, a minor portion of your portfolio should be dedicated to debts.
Income Investing
The investment in income avenues that gives a steady stream of income is what income investing is all about. This steady stream of income could be dividend income or interest income.
Example 1: The best example of this is an investment in stocks that gives a steady dividend such as REITs.
Example 2: The second way to achieve it is by investing in Bonds or Debentures that can give you steady interest.
This investment strategy is good for older people who have retired from their service and whose active source of income is very low or zero.
Conservative Investing
This investment strategy includes people who have low to moderate risk-taking capabilities. This can be achieved by investing in large caps blue-chip companies. In their investment portfolio, a major amount is on fixed income security like debentures or bonds which is 70% to 80%, and a small portion of 10% to 20% in equities of the Blue chip stocks.
Aggressive Investing
This is exactly the opposite of a conserving investment strategy. Investors who can take higher risk comes under this category.
They include:
- Small Caps
- Mid Caps
- Commodities
- Collectibles
The portfolio of such investors includes 70% to 80% investment in equities, Small Caps, and Mid Caps and 10% to 20% of investment in debentures or bonds, and a very small fraction of those investments can go into higher-risk assets like collectibles or can also be cryptocurrencies.
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