Investment is a lot about discipline and just a little about luck. If you are a disciplined investor, chances are you will not go too wrong with your investments.
If you find that you are going wrong with your finances, here are some guidelines that should help you back on track.
1. Risk is part and parcel of investing
The crux is to know how much of a risk you are willing to take. Equity (stocks and mutual funds that invest in the stock market) are the riskiest investments. The safest are the ones backed by the government: the Public Provident Fund, National Savings Certificate and post office investments are prime examples.
Between these two extremes are fixed deposits and bonds from companies. Bank fixed deposits are more safe than company fixed deposits. Depending on the company in question, some fixed deposits/ bonds could be very safe and some very risky.
2. Look for the trade-off
The higher the risk, the greater the return. The logic being, you have to be compensated for taking more of a risk. Hence, equities will give the best returns over time.
Within company deposits and bonds, the more risky the investment, the higher the interest rate. Let's say Company A is offering you 8% for a deposit while Company B is offering 12% for the same deposit. The chances are much higher that Company A can repay back your principal amount in time and pay you the interest as against Company B.
3. Use time, not timing
Don't try timing your entry and exit into the stock market. It is rare that people get it right. Instead, be regular in your investing. If you are bullish on a particular stock, invest small amounts in it regularly. Or, you can do so via a mutual fund. In this way, you can ride the ups and downs of the stock market.
4. Be realistic in your expectations
Gone are the days when you can get an 80% return from the stock market. Or even a 45% return. Historically, equity has given a return of 15%-18% per annum. Expect this much. It is much higher than the other fixed return investments. If you get more than that, good for you!
5. Don't let taxes be the starting point
We should all work towards saving our taxes. But don't let your investments be guided by that factor. For instance, people keep taking insurance policies they do not need just because it makes good tax sense. Give tax planning its rightful position but don't put it above everything else.
6. Stay away from tips
Remember, hot tips are meant to burn your fingers. Sometimes you may get lucky, but it does not pay in the long run. When you invest in shares, you must do so with the long-term in mind. Focus on the company and the business it is in. Once you have invested in it, keep track of how the company performs.
Ditto if you are investing in a mutual fund. Buy one whose performance has been consistent over the years. And stick with it for a while. Keep monitoring its portfolio and any fund manager change.
7. Asset allocation is important
Decide how much of your money you want to invest in shares and how much in fixed return investments. Then stick with your asset allocation. Just because the stock market is going up, don't change your allocation. Your asset allocation should never change with the market. It should only change with your age and your needs.
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