A wise man once said that in order to become rich, you must make money work for you. This certainly appears to be easier said than done but it is not entirely impossible. In fact, the internet is full of success stories of people in India who managed to invest and grow their wealth while simultaneously working at a 9-to-5 corporate gig. Their discipline and motivation to stay invested for a long time not only helped them become financially independent but also enabled them to leave their mundane jobs behind.

So, the million dollar question is how do you become one of them? Well, the short answer is you save, invest consistently and regularly over time, and take the advantage of the power of compounding. In a much broader sense, there are a few things that you need to keep in mind before you tread into financial waters.

Firstly, evaluate your financial condition

The prospect of investing in the stock markets and other investment vehicles is certainly an enticing one, especially considering the rewards they carry. However, it can prove to be quite detrimental if you jump the gun without even taking a look at your financial position. Before you start looking for new ways to invest your money, you should ensure that you have ticked all the boxes on this checklist:

You have a well-established budget. You must have heard about the importance of having a budget a thousand times by now and you are quite likely to hear this more in the future. It is because having a budget helps you track your money – whether it is coming in or going out. You are aware at all times where your money is going which, in turn, will help you realise how much cash you can afford to save and invest.

Budgeting will also help you realise your short-term and long-term goals like taking a vacation, marriage, buying a house or even buying a new mobile. If you don’t have a budget, you should definitely make one and be sure to stick to it!

Your debt is under control. By debt, we are not talking about your monthly credit card dues. The word here is used in a much broader context like student loans, car loan, home loan, et cetera. As long you have these liabilities, your money will never be truly yours. Before you start investing, you should ensure that you have cleared at least a considerable chunk of your debt.
Alternately, you can also invest and clear your debt at the same time. It is possible by splitting your money into two halves and then directing it to your debts and investments. However, the proportion in which you are dividing your money depends on several factors like loan tenure, interest rate, the rate of return on the investment, et cetera. You can also pay the minimum amount due every month and then invest some, but this may lead to a longer tenure.

Your emergency fund is already set. As a rule of thumb, it is recommended to have at least 3-6 months of expenses saved up in a separate account. Emergencies never come knocking and should you find yourself in a difficult situation, you should be able to handle your finances without digging into your savings and investments.

If you don’t meet these points, we urge you to reconsider investing as you are better off putting your money in your emergency fund or clearing your loans. On the other hand, if you have covered all the areas, then you will have a better idea of how much you can afford to invest.

Improve your financial knowledge

Instead of relying on a third party to give you financial advice, it is better to make your own decisions. Your monetary judgements will follow a strong chain of logic and reasoning rather than blind speculation and market hype. Furthermore, 10 financial planners may give you 10 different ways to invest your money but at the end of the day, you are more likely to trust your own judgement.

To begin with, you should consider reading few of the many books written on the topic of investing. The Intelligent Investor is still considered to be the bible of investing and this is where every novice investor should start. You can then follow this with more literature and take a basic course in finance and economics. You can also learn how to analyse a company’s balance sheet and evaluate its financial position to help you pick the right stock. Another thing that you can do to become market savvy is to follow sites like Bankbazaar.com, which provide a thorough fundamental analysis of companies.

Know your investment options in India

When it comes to investing, it is important to know that it varies from person to person. For instance, one person may have an aggressive portfolio with a high-risk factor while another person may prefer a safer option and have a portfolio that is less risky. That’s why, before you start investing, you need to consider what kind of gains you are looking to pursue. To help you answer better, ask yourself the following questions:

• What are your financial goals?
• What is your risk appetite?
• For how long are you willing to invest?
• And lastly, how much money can you invest?

Your investment portfolio will be determined by your answer to these questions. Ideally, you should have a portfolio comprising the following:

• Long-term and short-term investments
• Fixed-interest investments and slightly riskier investments for maximum gains

As an investor in India, you have access to plenty of investment instruments in these two categories. For the sake of simplicity, we have broadly categorised them here into ‘Secure’ and ‘Risky’ options.

• Secure investments in India – Some of the safest investment vehicles in India are fixed deposits in banks (6% – 8%), Public Provident Fund (7.6% as of June 2018), National Pension Scheme and Post Office Savings Scheme. In addition to this, you also have the option of investing in gold. Even though the price varies on a daily basis, it is undoubtedly among the best hedge there is against inflation.
• Risky investments in India – These investments are dubbed risky because they are subject to market risks. Some of the most popular options are Equity Linked Savings Scheme (ELSS), mutual funds, and direct equities, also known as stocks. While these instruments have the potential to generate excellent returns in the long-run, you should select them carefully, based on a thorough research.

By having a diversified portfolio, you will able to mitigate risk effectively and make the most of market conditions. Furthermore, schemes like PPF, ELSS, mutual funds, and NPS allow people to join by investing just Rs.500 – Rs.1,000 on a monthly basis, which certainly is in budget. As you progress in your career, you can boost your monthly investments for maximum gains. You should also make it a habit to examine your portfolio on a half-yearly basis and make the necessary changes.

Remember, becoming a successful investor takes skill, dedication and most importantly, patience. All the best!