Here is what first time investors need to do
“The journey of a thousand miles begins with one step” – Lao Tzu
I still remember my 20s, first job, reasonably good money, carefree attitude and having a lot of fun. It seemed as if all the years of hard work, burning midnight oil to study, finally paid off. After all, how great it is to be able to do what you want to do and when you want to do it. I was making good money but unfortunately, I did not know how to put this income to best use. I committed some mistakes and these mistakes did cost me. I don’t want you to go through the same and hence thought of writing something on how to start your investment journey:
All I want to know is where I’m going to die so I’ll never go there – Charlie Munger
One of the best investment thinkers of all time, Charlie Munger, also said that an ounce of prevention is worth a pound of cure—except it really isn’t often a mere pound. An ounce of prevention is often worth a ton of cure. Early in my career, I dabbled with day trading, derivatives and invested on tips from friends. From sugar stocks to pharma stocks, you name it and I surely lost some money. If I were to start again, I will avoid these mistakes:
- Don’t ignore insurance. Try to have some health insurance (above the one provided by your employer) and term-life insurance (if you have dependents).
- Don’t pretend to be a stock picker if you don’t have the time and skill to be one.
- Don’t dabble with futures, options and other derivatives. Most people don’t realize the risks of leverage. I recently came across how a day trader lost Rs 24 lacs in five minute. This is a good reminder of the risks of trading without knowing the intricacies of derivatives trading.
- Don’t try to time the market.
- I will go as far as to say that don’t open stock trading account for a few years.
- Stay away from advisor or anyone who promises high return and no risk (read Five tell-tale signs of a ponzi scheme).
Prerequisite for mutual fund investing
While my personal experience with stock investing was bad, I knew I made some mistakes and I can still generate decent returns by correcting some of these mistakes. I started investing in mutual funds, equity as well as debt, in systematic manner, and my experience has been quite satisfactory. There are certain prerequisites for investing in mutual funds:
- Check your ‘Know your customer’ or KYC status here.
- If you are not KYC compliant, contact your advisor. You need to fill the KYC form and provide identity proof and address proof. The process can take two weeks. If you want to invest less than 50000/year, you can also do aadhar based e-KYC. For this, you need to have an aadhar card and also have the same mobile number that you gave while applying for aadhar card. This is instant KYC.
You can find more information on how to go about mutual fund investing in our FAQs section.
Start early, set financial goal and invest systematically
While we all know the formula for compound interest, very few of us realize that the biggest gain come after a few years of investing. You put yourself in a position of great advantage by starting early and staying invested for long-term. It is essential that you don’t make large sum of investment at one go in the beginning. Many of my friends invested heavily in 2007-08 and then came the market fall. Their initial bad experience had a big impact on their investment behavior subsequently. It is imperative that you build confidence in equities by investing systematically that will reduce risk of large loss.
Have a reasonable return expectation from stocks
Sometimes, when our expectations are too high, we get disappointed easily. Occasionally, such disappointments can lead us into the hands of fraudulent operators who promise the moon. Historically, Indian stock market has delivered ~15% annualized return. This is a reasonable expectation. However, equities don’t deliver uniform return across time. Sometimes, it will be higher and sometimes lower. The key is to remain invested and invest more when the rolling returns are less.
Finally to summarise:
- Be insured, avoid committing costly mistakes, avoid day trading/derivatives.
- Start early, invest systematically (SIPs), have a long-term investment horizon.
- Keep return expectation reasonable. Stay clear of people promising free lunches.
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