When it comes to money, discipline is the key. It is good to keep things simple. One challenge I do see investing in stocks is, ‘it is very hard to pick the right one’.
The company may be very good, but the stock will not perform well because it is overpriced already. You may get a lot of gain in a few stocks, and one bad stock could eat up all your gains. Either way, all these are investments for the long term and do not look at short term gains or trades. Every time I try to do short term trades, I have either lost money or missed out on the gains selling the stock early. Also, stocks take up your time.
Some people say mutual funds are great and you should choose the right mutual fund and invest your money there. Again, you will have to research and pick the right mutual fund. Also, you end up paying mutual fund fees to manage your money.
I am a big fan of Index funds. The NIFTY 50 and S & P 500 fall under this category. This is the simplest way to invest your money. Essentially by buying NIFTY 50, you are buying the top 50 stocks in India. (The equivalent of this in the States is [VFIAX] Vanguard’s S&P 500 or similar). By doing this, you do not have to monitor individual stocks and you are betting on the country (India). India is bound to do well over a period of time and it is an emerging market.
How do I buy Index Funds?
The key here is to invest as a SIP (Systematic Investment Plan). However, the interesting thing about all this is that you do not need to know a lot. You can be an average or below average investor and do extremely well.
Let us say you have decided to invest Rs. 10,000 every month.
Step 1: Open an account with UTI or HDFC or similar.
Step 2: Transfer Rs. 10,000 every month to UTI Money Market Fund (or similar).
Note: Rs. 10,000 will be in your Money Market Account (which is similar to a savings account and also gets you a bit of interest).
Step 3: Divide Rs. 10,000 by 20 (approximately twenty trading days) =Rs. 500. Buy UTI NIFTY INDEX Fund for Rs. 500 every trading day. The money will come from your Money market account.
The reason you are buying every day is that you are averaging the price out (This is also called Rupee Cost Averaging). Even if you do not understand this, do not worry about it a lot. You will figure it out over a period of time. Instead of Rs.10,000 if you can do more, follow the same three-step process. Do this for a period of twenty or thirty years. You will retire well and also learn other things along the way.