In the time of quarantine, we have got the opportunity to spend time with our loved ones or take up the activities which were once set aside because of a busy work schedule. It’s time to rebound and it’s also the time to invest. Most of the countries are impacted by the recession and economy slowdown. But it is an ideal time to invest. But before investing and moving along with the crowd, ask yourself why do you need to invest?

In this blog, we will go through some basic investment principles. We will start by answering the question – “Why do you need to invest?”

 Investing ensures the money you earn has the power to earn more money for you.

One primary goal for investing is to beat the inflation. We all know the purchasing power declines with time. The value, a hundred rupee note had ten years back is not the same anymore. However, investing comes with risk. You need to take some level of risk for a potential return. But if you remain invested for the long term, the ups and downs of individual periods are averaged.

There are three main factors that affect investments- Risk, Return, and Time

Risk– Risk is uncertainty about future returns. Simply put, risk is the possibility of losing money. There are different tools to measure risk but the most widely used tool is Standard Deviation. It measures the extent to which return varies from the mean.

Return– Return is how much an investor earns over a given period. Investors look at both absolute returns and relative returns to a benchmark.

Time– Time is the most interesting of the three factors as it has a powerful interrelationship with risk and return. Over time, an investor can be more assured that an asset class’s return will approach its historical average, which is like saying risk will be reduced. A plan of long-term investment lowers risk, thus helping the investor have more confidence about meeting his goals.

Every investment requires strategies and planning to mitigate the risk and earn higher returns at the given risk level. Following are some strategies that one undertakes while investing –

• Market Timing- One of the strategies is long term investing. However, a popular but unreliable and dangerous strategy is timing the market. Market timers make profits over the short term by moving money in and out of different markets like from bonds to stocks to cash. However, the chances of being successful for any long period for market timers have been very less. Market timers are the ones who have lost a good chunk of returns from the market

• Rupee Cost Averaging- As it gets dangerous to trade on a short-term by market timing, one alternative and good strategy is rupee cost averaging. In rupee cost averaging, an investor purchases equal rupee amounts of securities at regular intervals over a period of time. By keeping the rupee amount consistent, the investor buys more shares when prices are low and fewer shares when prices are high. In addition to its numerical rationale, rupee cost averaging establishes a discipline for investing at regular intervals rather than risking investing when the market is high and selling when the market is low.

• Reinvesting- Another important principle is to reinvest the interest and dividends that are paid by a portfolio to maximize returns. When an investor reinvests, the investor is earning a higher return than cash. Returns decline significantly if dividends or coupon payments are consumed instead of reinvesting.

• Compounding- Compounding is a particularly powerful process. It assumes that the investor not only reinvests his income as it is paid but that he doesn’t withdraw any appreciation. That means, in effect, that both appreciation and income are being reinvested.

• Diversification- Diversification of investments means to distribute capital among different asset classes to limit the maximum exposure to any single security and the impact it can have on the return of the entire portfolio. A diversified portfolio should contain a mix of stocks, bonds, cash, and other investments that meet an investor’s goals. The idea of diversification is to combine assets that act differently during changing economic and market conditions.

Plan your investment according to the strategies this quarantine. As the future is uncertain and as the things unfold one moment or the other, it is better to take precautions and be prepared for the worst. Stay home, stay safe. Plan things and start investing.

                                  Wish you and your family good health!