Investment Basics

No matter how much you invest or where you put your money, don't miss the basics.

1) How much do your investments pay Your public provident fund or PPF pays you 12 per cent (and that's tax free), your bank pays you 12 per cent on the fixed deposit (and that's not tax free). So if you haven't put the maximum allowable amount in the PPF, what are you waiting for, unless you pay no .taxes. Do some comparison shopping and find investments with comparable risks and higher returns to you. Later in this book I will walk you through the choices and comparisons that will help you pick the best products for you and tell you the best places to find these products.

2) Risks involved It is human to feel worse when we lose money as compared to the happiness we feel when we make money. It is crucial that we try to avoid losses or, in investment terminology, preserve the principal amount.

3) Liquidity How soon can you get your money if you need it? If you have short term needs don't make long term investments. Adjust your portfolio with your needs and profile look at your short term, medium term and long term financial needs. Invest accordingly. For example, if you need cash in the next three months, don't buy long term bonds or risk buying stocks where the market could move either way.

4) Look at your age and income profile A 70 year old does not have the same investing needs as a 21 year old. So you need to look at what you need the money for and how many years you have to reach that goal. Your income level will also limit the type of investments you can get into.

5) Learn to let go It's not just important to know when to invest, it's important to know when to get out. Don't keep holding on to investments that are dead and are not going to appreciate any more. It's more common for debt instruments to become dead investments than for stocks and mutual funds, if they are basically sound that is. If there are market rumours about delays in payments from a company of which you have a fixed deposit or debentures, try to get back your money or sell your investment immediately. In most cases, stocks and mutual funds rarely go belly up but could fall in value. Chances are they will bounce back again.

6) Investing requires constant planning and review Investing is like having a garden you have to continuously work at keeping it neat and green. Similarly, investments must be always monitored, the bad ones sold and replaced with good ones. 7) If it sounds too good to be true, it probably is Use your common sense. If a company offers to pay you ridiculous rates of interest on deposits, bonds, etc. which are way higher than the prevailing market rates, they probably have no intention to pay back your original investment it's just a temptation. Think about it how does a person who pays you 48 per cent plan to use your money? The only thing I can think of is drugs, smuggling or contraband. And if that's the case, you definitely don't want to get involved.

8) Never try to time the market For that you will need to know the right time to buy and the right time to sell. Miss either and you'll be left blaming the market, the broker, your friends and everybody in the world for your loss. I have not known anyone who has known when to get in and get out including the so called investment gurus. Don't forget, most of the market's gains occur in just a few strong but unpredictable trading days here and there. To tap the market's long term performance, you have to be in the market on those days and chances are you will have something more urgent to do at the time. Most of you know timing the market is a bad idea. Lots of you have burnt your fingers trying it. The key to successful investing is that you invest regularly and consistently rather than looking for the best time to get in and out. And why is that? Simply because historical evidence shows that the law of averages works you will do better with regular investing rather than by trying to outguess the market.

9) Discipline is crucial It's just not enough to have an investment plan that matches your goals, risk tolerance, and time horizons. The hardest part is learning how to stick to your plan during market downturns, which are normal in any market, though they may be unpredictable.

10) Read the fine print Don't make investment decisions without understanding the investment product and reading the literature (usually tailed the prospectus or the offer document) that comes along with the application form. Fixed deposits don't carry any security if the company doesn't pay. And yet we end up cribbing and blaming the government, the system, the company and everybody else but ourselves for not reading and understanding the risks of putting money in such a deposit.

11) Not sticking to your investment objective Investing without a goal is like driving without knowing where you are going. So invest only after you have decided what you are investing for and stick to investments that will get you to that objective.

12)Selling to lock in your profits quickly Whether it is real estate or stocks, some of us rush to sell once we see our gains double or triple. There may be more steam left in the investments. And you would do well to wait and see how much more appreciation is there in your investments before selling out.

13) Historical performance of an investment While historical performance may be a good starting point to choose an investment, it is rarely the deciding factor. A share could have done well just because it was a market favorite last year, a bond could have produced higher returns because of high interest rates, a mutual fund could have performed well because the shares that it held last year did very well or land in a particular area become more expensive because of expectations of a new highway which never got built.

14) The power of diversification Investing in a number of investments will ensure that the poor performance of any one investment does not burn a hole in your pocket. Not only should you try to diversify by buying different shares, you should diversify across unrelated investments like shares, bonds, mutual funds, real estate and even gold. And the lower the correlation between two types of investments, the better they are for diversification. For example, high interest rates are good for bonds and bad for stocks. Buying the two ensures that you don't lose a chunk of your money because one is not performing well. How do you diversify and how do you decide what to put in each investment? That depends on what you are investing for, how long can you invest for, how much risk can you stomach and how much money you have. If you have Rs 50,000 to invest, it may limit your choices. If you have Rs 5 lakhs to invest, you could do a much better job of diversifying your investments.