Basics of Investing

Investing is something that even otherwise knowledgeable people mess up. Brilliant doctors, engineers, and business owners — experts in their own fields — often get this fundamentally wrong.

Here is a simple, no-nonsense guide to get you started. While the examples are more for an Indian context, the principles are universal.

Before You Invest: The Boring Stuff That Matters

"Every penny saved is every penny earned" is probably the most underrated statement in personal finance.

Before we talk about stocks and mutual funds, here are the fundamentals that most people skip:

• Eliminate high-cost debt first. Credit card debt at 36-42% interest will destroy any investment returns. Pay it off before investing a single rupee.

• Prepare a budget and stick to it. Know where your money goes each month.

• Provision for yearly expenses. Insurance premiums, car servicing, home trips, vacations — plan for these so they don't derail your investments.

• Understand wants vs needs. A one-generation-old phone may be just as good as the latest one for most of your needs — at a much lower price.

• Look for offers on big purchases. A little research can save you thousands.

The best investors are often the best savers first.

Quick Glossary

Before we dive deeper, let's establish a common language:

Insurance is NOT Investment

One of the most common mistakes Indians make is treating insurance as an investment.

Insurance is insurance. It exists for unforeseen circumstances — not wealth creation.

Life Insurance: Only If You Have Dependents

Life insurance is for those who have people depending on their income — a spouse, children, aging parents. If no one depends on your income, you don't need life insurance.

The right approach:

1. Buy term insurance — pure protection, no investment component
2. Ensure adequate cover — at minimum 3-5x your annual income. Some advisors recommend up to 10x if you can afford it
3. Avoid ULIPs, endowment plans, and money-back plans — they make the insurance company and agents richer, not you

Cover Your Home Loan Separately

If you have a home loan, consider a separate term plan that covers the outstanding loan amount. This ensures your family isn't burdened with EMIs if something happens to you. Some banks offer loan protection plans, but a standalone term plan is often cheaper.

The MWP Act: Protecting Your Family's Claim

In India, the Married Women's Property (MWP) Act, 1874 allows married men to create a trust for their wife and/or children through life insurance. When you buy a policy under MWP, the payout becomes the sole property of your beneficiaries — protected from creditors, estate claims, and even family disputes. It's an unbreakable trust for their future. Ask your insurer about the MWP addendum when buying term insurance.

Health Insurance: Non-Negotiable

Health insurance was always important. Post-pandemic, it's something we simply cannot live without.

Key considerations:

• Get adequate cover for yourself and your family — ₹10-20 lakh minimum in metros
• The earlier you enroll, the lower the premiums
• Read the fine print: exclusions, co-pay percentages, waiting periods
• For people with pre-existing conditions and senior citizens, insurance is expensive and hard to get — but that's exactly why you need it
• Even if you have employer or government cover, have a personal base policy — job switches and policy changes happen

Emergency Corpus: Your Financial Airbag

Before you invest anything, build an emergency corpus — money for when something unfortunate and sudden happens.

Think about: a medical emergency, an accident, a job loss, a business slowdown.

How much?

The old rule was 6 months of expenses. After COVID, most experts recommend 12 months of monthly expenses as a minimum.

Where to keep it:

Define Your Goals

Every investment needs a purpose. Without goals, you're just gambling with a respectable name.

Common goals:

• Child's higher education
• Down payment for a home
• A family vacation
• Retirement

Each goal has a different timeline and required amount. This determines your investment strategy.

Example calculation:

Want to accumulate ₹25 lakh in 10 years for your child's education?

If you've already saved ₹50,000 and can expect ~12% annual returns from equity, you'd need to invest approximately ₹11,000 per month via SIP.

Asset Classes: Know Your Options

Now let's look at where you can actually put your money.

Cash & Near-Cash

The problem: Inflation runs at 5-6%. Your money actually loses purchasing power sitting in cash.

Use for: Immediate needs (under 1 year), part of emergency corpus.

Fixed Income Instruments

Indians love FDs. But here's the uncomfortable truth: after tax and inflation, your "safe" FD might be giving you near-zero real returns.

Debt mutual funds offer some advantages over FDs:

• Better tax efficiency (especially if held 3+ years)
• Professional management
• Easy liquidity

Equity: Where Real Wealth is Built

Equity means ownership — stocks and mutual funds that invest in stocks.

But there's a catch: Equities are volatile. They go up fast and come down fast. The secret is staying invested over long periods to ride out this volatility.

Commodities

Gold is the most common commodity investment for Indians. Options include:

• Physical gold (least efficient — making charges, storage, purity concerns)
• Gold ETFs (trade like stocks, backed by physical gold)
• Sovereign Gold Bonds (best option — government-backed, 2.5% annual interest, tax-free if held to maturity)
• Gold mutual funds

Real Estate

Every Indian dreams of owning a home. Your first home is essential and emotional — that's fine.

But buying additional properties for "rental income"? The math often doesn't work:

The Magic of Compounding

Remember compound interest from school? Here's why it actually matters:

Look at that table carefully. The person who started at 25 invested just ₹6 lakh more but ended up with ₹1.8 crore more.

Time in the market beats timing the market. The earlier you start, the less you need to invest to reach the same goal.

SIP: Making Equity Palatable

SIP (Systematic Investment Plan) is what makes equity investing accessible to ordinary people.

Instead of investing a lump sum and worrying about timing, you invest a fixed amount every month — regardless of where the market is.

How SIP helps:

1. Rupee Cost Averaging — When markets are high, your SIP buys fewer units. When markets fall, you buy more. Over time, this averages out your cost.

2. Removes timing anxiety — You don't need to predict the market.

3. Builds discipline — Automated investing means you don't "forget."

4. Starts small — You can begin with just ₹500/month. No excuses.

Asset Allocation: The Real Secret

Now that you know the options, here's the key question: How much in each?

A simple rule of thumb: (100 - Your Age) = Equity %

This is a starting point, not gospel. Adjust based on your risk appetite, goals, and circumstances.

Putting It All Together

Here's a simple checklist for financial peace of mind:

1. ✅ Eliminate high-interest debt
2. ✅ Get adequate term insurance if you have dependents (3-5x annual income minimum)
3. ✅ Get health insurance (₹10-20 lakh minimum)
4. ✅ Build emergency corpus (12 months expenses)
5. ✅ Define your financial goals with timelines
6. ✅ Start SIPs aligned to each goal
7. ✅ Review and rebalance once a year

Markets may crash, jobs may go, accidents may happen — but having this foundation will help you tide through unforeseen circumstances.

What's Next?

This was the foundation. In the next articles in this series, we'll dive deeper into:

• Equity Mutual Funds — Part 1: The Basics — Understanding the types, safety, and mechanics
• Equity Mutual Funds — Part 2: Your First Fund — How to actually choose a fund without getting overwhelmed