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Learn to invest like a Professional - Investing basics

Mention the word investing and people tune out. Many are intimidated by the very talk on finance. At the other extreme are those who just blindly put their money on any tip that they hear. If you are new to investing or want to invest smartly, here is a beginner's guide to investing.

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3 reasons to invest

1. Long-term accumulation of wealth: Investing has proven to be the best way for the long-term accumulation of wealth. Sure, there are risks associated with it. But, if one takes only risks that are suitable to one's stage in life and investment horizon , then investing provides a great way to take advantage of the compounding of capital over a long period of time.
2. Take advantage of Compounding of Capital: Compounding is the ability to earn a return in the current year on not only your principal amount but also on the returns earned in the previous year. Compounding is the process through which your money multiplies, and you can earn returns that can go towards meeting your various financial goals in life such as educating your children, or paying for their marriage, or buying a new house, or paying for your parents' health care costs and so on.
3. Stay away from speculation and gambling: New comers to investing often make the mistake of behaving in a rash manner, throwing their money blindly into things they don't understand. This isn't investing, its speculation which is more like gambling where you are relying on chance and luck. Investing on the other hand cannot be left to chance. It requires patience, especially for your investment thesis to mature, something speculators have little time or interest in.

How do Professionals invest?

Ask any professional, and they will tell you that they never make an investing decision without the following framework.

• Risk taking capacity: Suitability of the investment for your unique situation
• Financial goals: What do you need to generate returns for
• Time horizon: By when do you want to exit the investment
• Liquidity: How quickly you want to convert your investment into ready cash
• Capital growth or regular income: Whether it provides you adequate protection against inflation
• Taxability: What kind of tax liability do you create

Just like not all medicines are suited to all patients, not all investments are suitable for every investor. A common question that newcomers ask is "tell me the best investment for my money" and immediately expect a one sentence answer. It's like a patient asking the doctor for the best medicine. Before the doctor prescribes a medicine or the relevant dosage a thorough investigation of the symptoms, allergies and pre-existing condition has to be conducted. You wouldn't feel confident with a doctor who blindly prescribes medication to you. It's similar when it comes to investing. You need to do a through analysis of your unique situation before you or any advisor can choose the "best investment". Its for this reason that an investment made by those around you might not be the right investment for you, because you might be at a different stage of your life, with a different risk profile and financial assets and liabilities.

Where to invest?

Different investment assets offer differing returns characteristics, and fulfill different purposes in an investor's portfolio. The following chart is a simplification of some generic asset classes and is only meant as an educational aide to a beginner investor. Please consult your financial advisor before making any investment decisions.

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