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Conduct thorough research before investing

You must understand what you are getting into before selecting an investment. It is important to look into the risk profile, potential returns and the time horizon of different types of investment. The more you know, the better your decisions will be.

Set a clear budget for investments

Make sure to evaluate your income and financial goals to determine a budget for your investments. Investing can be a long-term journey, so you must ensure you are committing an amount you can sustain over time.

Assess your risk tolerance

Investments vary in risk, from low to high. Your risk tolerance should match the investment type. So, remember to assess your comfort level with risk to make sure you are picking the right options.

Understand liquidity limits

Each investment has its own liquidity limits. Some may allow quick access to your money, while others might take longer. You must know these limits to avoid inconvenience when you need cash.

Check for tax implications

The returns from your investments can be taxed as per the prevailing tax laws. You must understand the tax rules before you invest, as taxes can significantly impact your overall returns.

Consult a professional financial advisor

You may consider consulting with a financial advisor for investment guidance. A financial advisor can help you narrow down suitable investment choices, explain market dynamics and assist you in making informed decisions.

Unit Linked Insurance Plans (ULIPs)

A ULIP is a life insurance plan that helps you save money as well as provides you with a life cover^{`</sup>. It provides you with market-linked returns to fulfil your financial goals and a life cover<sup>`} to secure your loved ones financially in case of an unfortunate event. ULIPs offer you the flexibility to invest in equity, debt, or a combination of both funds as per your risk appetite. You can choose the amount you want to invest regularly in your ULIP. With a mandatory lock-in period of 5 years, ULIPs are best suited for the long-term investment horizon.

The premiums paid under the policy are eligible for deduction up to 1.5 lakh p.a. subject to conditions under Section 80C of The Income Tax Act, 1961. The returns from ULIPs are also exempt as per conditions mentioned under Section 10(10D) as per the prevailing laws.

Savings/endownment plans

An endowment plan is a life insurance plan that offers fixed returns along with a life cover^`. These are low-risk plans that help you save regularly for your future financial goals. You can choose the amount you want to invest regularly in your plan. The returns from these plans are not market-linked and hence, are free from market-related volatility. Depending on the type of plan you choose, you can receive the returns from the plan as lump sum or regular income.

You may consider investing in an endowment plan for your non-negotiable goals, such as your child's education or marriage, buying a house, and more.

The premiums paid under the policy are eligible for deduction up to 1.5 lakh p.a. subject to conditions under Section 80C of The Income Tax Act, 1961. The returns are also exempt subject to conditions prescribed under Section 10(10D) of The Income Tax Act, 1961.

Public Provident Funds (PPF)

You can invest in PPF through your bank or the post office. The returns on PPF are slightly higher than prevailing interest rates from banks. PPF investment comes with a lock-in period of 15 years. The minimum investment amount is ₹ 500 per annum, and the maximum is ₹ 1.5 lakh per annum. The contribution to PPF is eligible for tax deduction as per conditions mentioned under section 80C of the Income Tax Act, 1961. Returns recovered from PPF are exempt under the Income Tax Act, 1961.

Fixed deposits

A fixed deposit is a type of investment. You can deposit an amount as a fixed deposit with your preferred bank and earn fixed returns. They are low-risk investment options and come with a lock-in period.

Stocks

Investing in stocks refers to purchasing shares of listed companies. This requires an understanding of the stock market and carries high risk. The returns are market-linked and can be affected by market-related volatility.

Mutual funds

Mutual funds are market-linked instruments. Professional fund managers usually manage investments in mutual funds. You can select from a large number of options which include equity, debt or a mix of both funds. The investments can be made as lump sum, or in a periodic manner. The returns from mutual funds are market-linked and hence, are affected by market conditions.

Real estate

Purchasing real estate is a traditional investment option in India. With real estate investments, you can have the option to get a regular income in the form of rent or sell it for a lump sum amount. The returns from real estate can vary depending on market conditions, the property's location, and more.

Bonds

Bonds are a type of debt instrument issued by governments, municipalities and corporations. When an entity issues a bond, it is essentially borrowing money from the public. Your investment acts as a loan to the issuer, and in return, you receive regular interest payments, which helps you earn a profit.

ETFs

Exchange-Traded Funds (ETFs) are a basket of securities that pool money from multiple investors and invest in a diversified portfolio. Unlike mutual funds, they are traded on the stock exchange like individual stocks.

Here’s why it is essential to invest your money:

Wealth creation

Investing helps you surpass the limits of your income and budget, enabling you to aim for more substantial financial goals. It allows you to build wealth over time and increase your net worth with the power of market growth.

Financial security

Investing offers a sense of financial security. As your investments grow over time, your net worth increases, and so does your liquidity. This provides you with the financial security to handle unexpected situations and ensures that you have the necessary resources to meet your needs.

Passive income stream

Some investments can be used to create passive income through dividends, interest or rental earnings. This extra income can supplement your salary or even replace it over time.

Preserve buying power during inflation

Investing helps you protect your money from the effects of inflation. Assets that offer returns to tackle inflation ensure that your buying power is preserved in the future so you can maintain your standard of living.

Retirement planning

Investing can be used to plan for specific financial goals like retirement. It helps you prepare for your golden years when you no longer have a regular salary.

Tax benefits

Many investments qualify for tax^* benefits under the Income Tax Act, of 1961. Investing in these tax-saving instruments reduces your taxable income, allowing to claim deduction and keep more of your money for future financial goals.

a) Savings

This is the money you set aside from your income for a particular goal, such as buying a car, travelling, staying financially prepared for an emergency, and more. The risk associated with savings is minimal. However, savings do not offer any considerable growth of money.

b) Investment

When you invest your money in the right way, it grows in value and provides you returns. Your investments can be used to fulfil your financial goals such as buying a house, your child’s higher education, and more. Investments also carry a risk that may vary for different investment products.

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Short-term investments

Short-term investments are held for less than three years. They carry lower risk and provide moderate returns, making them suitable for parking surplus funds, managing short-term expenses or preserving capital. Some common short-term investment options include liquid mutual funds, bonds, recurring deposits and others.

Long-term investments

Long-term investments can span several years, often five years or more and are designed for wealth creation and capital appreciation. While they carry higher risk, they also offer the potential for higher returns. These investments are ideal for long-term goals like retirement or buying a house. Some popular long-term investment options include ULIPs, equity mutual funds, stocks, PPF and others.

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Below are some tips that can help you start investing as a beginner:

Set clear goals

Your investments should align with your goals to maximise their potential. Start by identifying what you need money for - buying a house, funding retirement, travelling or covering healthcare expenses.

Assess your risk appetite

Your ability to take risks will determine the investment you can add to your portfolio. If you are younger, you can afford to take on more risk with investments like stocks and equity mutual funds, which have higher growth potential. As you get older, your risk appetite will drop, and capital preservation will become a priority. So, safer options like bonds and fixed deposits may be more suitable.

Investment horizon

Understanding your investment horizon in relation to your financial goals helps you choose between short-term and long-term investment options. The former is suitable for goals that need to be fulfilled within three years or less, while the latter is better suited for building wealth over several years.

Create a budget

Creating a budget helps you determine how much you can invest each month while ensuring you meet your present needs. It allows you to allocate your income wisely across different investment options.

Set aside an emergency fund

Setting aside an emergency fund is essential as a beginner to ensure you have a safety net for emergencies. Investments like liquid funds and high-yield savings accounts can be suitable options for parking emergency funds, as they offer quick access to your money when needed.

Portfolio diversification

Diversification enhances the potential success of your portfolio by spreading risk across different investments. It can help reduce volatility and potentially increase returns over time.

Never borrow and invest

One of the most important investment principles to remember as a beginner is to never borrow money to invest. Taking on debt increases your liabilities and adds to financial risk. Instead, focus on investing your own money so your funds can grow over time.

Start early

Starting early can help you build more wealth. As a beginner, you may not have adequate funds, but by investing small amounts consistently, you can grow your wealth over the years.

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Power of compounding

Your investment earns returns. These returns are then re-invested to earn more returns. This process continues. Over time, this leads to significant earnings. This is called the power of compounding.

Below is an example to understand this better:

Mr. Sharma invests ₹ 10 lakh for 15 years at an interest rate of 5%. At the end of the first year, his investment amount becomes ₹ 10.5 lakh, i.e. he earns a return of ₹ 50,000 in the first year.

This amount gets re-invested. For the second year, the interest is earned at ₹ 10.5 lakh amount. At the end of the second year, his investment amount becomes ₹ 11.025 lakh, i.e. he earns a return of ₹ 52,500 in the second year. This is ₹ 2,500 more than the returns earned in the first year.

This process continues and by the end of the 15th year, his investment amount becomes ₹ 20,78,928.18. This means, he earns a total return of ₹ 10,78,928.18 in 15 years. This is because of the power of compounding. If his returns would not have been re-invested, he would have earned an interest of ₹ 50,000 x 15 = 7,50,000, which is about ₹ 3.3 lakh lesser.

More time to overcome any market fluctuations

Investments (especially market-linked investments) offer high risk. The returns can get affected by short-term market volatility. Starting early allows your investments to overcome these market volatilities and offer higher returns in the long term.

Achieve your financial goals earlier

You may have goals, such as buying a house or a car, starting a venture, retiring early, and more. When you start investing early, your investment provides you with returns at an early age. This enables you to achieve your goals sooner in life.

Beat inflation

Inflation is the increase in price of goods and services over time. This means you have to pay more to buy the same goods and services in the future. This can affect your budget.

When you invest early, you earn better returns. This enables you to stay financially prepared to beat inflation and stay worry-free.

Higher risk-taking ability

Age is an important factor when it comes to the ability to take risk. At a younger age, there are fewer responsibilities. This allows you to invest in high-risk instruments like equity or mutual funds to earn better returns.

As you grow older, your responsibilities increase and hence, your risk appetite decreases. You may then want to invest in instruments that offer low risk. These low-risk instruments may provide lower returns.

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Low-risk investments

The risk is negligible, but the return on investment may also be less than medium and high-risk options. These include instruments like government bonds, corporate bonds, treasury notes, and more

Medium-risk investments

The rate of return is moderately high here

High-risk investments

These investments offer the maximum potential for growth. These include instruments like mutual funds, ULIPs, equity, and more

First job

Since you are just beginning your investment journey, ELSS, Equity, and Term Insurance can be good options. These are all affordable instruments that do not require a lump sum investment. Moreover, the risk and reward are ideal for someone starting their career

Marriage

Health insurance for self and family becomes crucial at this stage. This ensures that you and your family stay protected against the costs of healthcare. So, you can focus on important goals, such as family planning and career planning

Birth of a child, buying a house, child education

ULIPs and savings plans make for a good choice here. These plans offer life protection and investment growth. Your loved ones stay financially secured and you can invest for long term goals

Retirement

Money back plans, unit-linked retirement plans, immediate annuity plans, and more such plans are ideal for retirement. The maturity benefits can help you maintain a similar standard of living in retirement as before, and the life protection component acts as a financial cushion for your family

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