A Step-By-Step Guide To Start Your Investment Journey

Beginning your investing journey may seem daunting. With so many possible investment choices, it’s important to develop a plan with your unique investment goals and risk tolerance in mind. Taking it step by step and staying informed may help you make more informed decisions and navigate the market more calmly. This article guides you through the initial steps so you may approach investing in a structured way.

Table of contents

• Understanding the basics of investing
• Setting investment goals
• Beginner-friendly investment options
• Diversification: The key to risk management
• Understanding risk and return
• Balancing risk and return
• Getting started
• Common mistakes to avoid

Understanding the basics of investing

Investing means putting your money into assets like stocks, bonds, or mutual funds to earn potential returns over time. Long-term investing aims to harness compounding, where your earnings generate their own potential earnings. Another core principle is that higher return potential usually comes with higher risk. For example, equities (stocks) offer the potential for inflation-beating growth over the long run but are volatile, while bank deposits are low risk but also yield lower potential returns. Thus, understanding the risk vs return dynamic, and also the impact of inflation on potential returns, may help you make informed choices.

Setting investment goals

Before investing, it is advisable to define your financial goals with a clear timeframe. Some examples include buying a house in five years, retirement in 30 years, etc. Defined goals may give a clearer direction and criteria for choosing investments. Goals help you pick suitable investment options and stay disciplined.

Typically, short- term goals require relatively stable assets with low or moderate risk, while long- term goals may be suitable for higher-risk, growth-oriented assets. It is recommended to map each goal to an investment type based on its time horizon and risk.

Read Also: Investment Strategies and Tips for Different Life Stages

Beginner-friendly investment options

Some options suited for beginners include:

• Savings avenues (PPF, FD) – Government or bank-backed options – such as public provident funds or fixed deposits – may help a beginner start inculcating the habit of saving money. These are low risk and offer fixed returns, making them suitable for conservative investors. However, returns may not keep up with inflation over time.
• Stocks (Equity) – For those willing to take on risk, shares of companies that offer ownership and growth potential. Equities can potentially yield high growth and dividend income over the long-term but are volatile in the short to mid-term. New investors may want to start small and stick to well-established companies.
• Mutual funds –These offer a possible alternative to investing directly in stocks. Mutual funds pool money from many investors and invest it in a diversified basket of assets. They are professionally managed, making them suitable for beginners who do not have vast market knowledge.

Starting a small SIP (Systematic Investment Plan) in a mutual fund may be an affordable way to begin investing. SIPs allow you to invest a fixed amount at regular intervals – daily, weekly, monthly etc – in a mutual fund scheme of your choice.

Beginners may choose diversified equity funds for broad market exposure. If they want lower risk, they may consider relatively stable debt funds. Those seeking a balance between risk and return potential may consider hybrid funds, which combine equity as well as debt securities in a single portfolio.

You may invest via a Regular Plan (through a distributor/adviser who guides you) or a Direct Plan (do it yourself). Regular Plans tend to have higher fees but offer guidance with fund selection and the investment process.

Diversification: The key to risk management

Diversification is the practice of spreading your investments across different securities, themes and even asset classes to reduce risk. If one investment performs poorly, another may perform better, balancing your overall potential returns. Instead of focussing on just one asset class as a beginner, you might want to include a variety of asset types in your portfolio.

Understanding risk and return

Return and risk are correlated - Investments with a higher return potential, such as stocks, carry higher risk, while low-risk securities, such as government bonds, offer lower potential returns.

It is advised to recognise your own risk tolerance and steer towards conservative options if market fluctuations make you anxious. You may take on more risk if you are comfortable with volatility in order to increase your potential gains, especially over a long horizon.

Balancing risk and return

Asset allocation is a key aspect of risk management. One strategy may be to decide what portion of your money to put into different asset classes (equity, debt, etc.) based on your risk profile and goals.

For example, an aggressive investor might choose to invest a majority of their portfolio in equities, with just a small debt allocation, while an investor with a moderate risk appetite may balance the two almost evenly. A conservative investor may lean towards debt instruments with low or zero equity allocation.

Over time, you may want to rebalance your portfolio to maintain your target mix as markets move and your financial situation evolves. This disciplined balancing may help you stay on track to meet your objectives while managing risk.

Getting started

Here are some practical steps that may help guide you through the process:

• Finish KYC and open accounts - Finish KYC formalities and open the necessary investment accounts.
• Start small and early - To gain experience, you may want to start with a modest investment. An SIP of even Rs. 500 or Rs. 1000 a month might be suitable. The earlier you start, the more time your money gets to potentially grow through compounding.
• Stay regular and monitor – It is suggested to make a habit of investing consistently. Review your portfolio once a year to see that it is diversified and remains aligned with your goals, as well as track your progress and make any necessary adjustments. If you are unsure, you may take advice from a financial advisor and continue to learn as an investor.

Common mistakes to avoid

• Absence of a clear objective - Investing without clear objectives may result in impulsive or inconsistent choices. You may want to define clear investment goals.
• Chasing recent performers - Avoid relying solely on historical returns. Past performance may or may not be sustained in future.
• Lack of diversification - It's not advisable to invest all of your money in a single stock or asset class. You may want to diversify your holdings to spread out risk in your portfolio.
• Market timing - Accurately forecasting the market's highs and lows is impossible. Also, buying and selling frequently may cause unnecessary portfolio churn. Thus, making periodic, regular investments and holding onto them over a long horizon may be more suitable.
• Herd mentality – Avoid following the crowd. An investment may not be suitable just because everyone else is recommending it. You may want to make decisions based on your research, your unique objectives and risk appetite.

Read Also: Long-Term Wealth Building: Smart Investment Strategies

FAQs

Why is it important for beginners to define financial goals before investing?

Defined goals may serve as a roadmap that may help you identify suitable investments and develop a disciplined approach to investing. Without specific goals, you might invest aimlessly. Without specific goals, investors may invest aimlessly, which may lead to suboptimal long-term outcomes.

How should a beginner consider risk tolerance when choosing investments?

Start by understanding how much volatility – i.e. fluctuation in the value of your investments – you are comfortable with. Identify if you are conservative, moderate or aggressive regarding risk tolerance and seek investments that fit those categories. If your investments are calibrated to your risk tolerance, there is less chance of panicking when the market faces volatility and exiting your investments out of fear.

What is the role of diversification in a beginner’s investment portfolio?

It is considered essential for risk management, as diversification may reduce risk by spreading it across multiple assets. Because you are investing your money across many securities and asset classes, underperformance in one may be offset by outperformance in another.

Why is investing consistently (e.g. via SIPs) suggested for beginners?

Investing consistently encourages discipline and can make it easier to build wealth over time. Moreover, SIPs apply rupee-cost averaging: you automatically buy more units when prices are lower and fewer when they are higher, which can help lower your average cost over the long run, though this outcome is not assured. This approach may help you navigate market volatility more steadily, but it does not eliminate risk or guarantee better returns.