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Before jumping into buying equity stocks or mutual funds or even that bank deposit, look back at where your money lies now, can all those products be classified as investments?

Making the right investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... is just as crucial as getting started. It’s NOT okay to start investing without knowing where your money is going or what the risks are.

Investing is the activity you are going to undertake for your money to work hard and grow. Investing is not about the money you will need today or tomorrow, its an activity that will help you grow money over many years. Everything else is just short-term parking of funds and not investments.

Let me spell it out.

Before knowing where to invest, you must figure out where not to invest!

1. Trading in stocks and bonds is not investing

Day trading is where you buy stocks at the start of trade and sell them by the time the market closes. This is done in the hope of earning a few percentage points worth of gains every day. If one is able to do this successfully on each trading day – that’s 20 days a month, then gains can look very good in just one month.

The danger, of course, is that there is no forward-looking basis for this trade, most traders will analyse the historical price trend and then try to assess the change on the next day. It’s a high risk – because it’s not based on fundamental qualifications – and high return game. Almost like a gamble. There is money to be made while the market trend is positive, but when that crash comes, you better watch out!

The truth is that most traders will continue this game until they are burnt by the risk they take! Some do succeed and remain at it, but those traders dedicate time and research to their trading. It’s not meant for beginners and its more a way to generate small-sized daily trading gains rather than investing your income.

2. Buying on tips

Did your neighbour tell you about that great stock that will double? Buy Yes Bank at ₹25 and surely, in three years or before you will have made a fortune? How about buying Kingfisher Airlines stock at ₹10 or JP Associates at ₹40? These are all companies which were well regarded at one point in time and when the stock price crashed, a lot of people found it hard to believe that these stocks won’t go back to their glory days. JP Associates at one time was a ₹300 stock and is now trading at ₹2.5. Yes Bank touched ₹400 just two years ago and is now at ₹20.

Stock tips are just optimistic reflections of naïve investors, with no research backing their claim of estimated return.

“Just watch it will go up!” is the best research you will get.

Plus, once you have invested, what is the price you should exit at? In all likelihood, you will see the price rise but keep holding it in the greed to make more money and then watch in horror as the price corrects all too quickly, before you can decide to exit!

This is another gamble and definitely not investing.

3. Money in the bank

Don’t confuse the money you are saving with your investments. Money lying in your bank, even in fixed deposits is really your money you are saving. There isn’t much in terms of investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains....

Ask yourself if this money is growing? Bank will pay you an interest but post tax and post accounting for inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More, you can be rest assured you have made very little real return if anything at all. Real return is the offered interest less the rate of inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More. InflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More is a word used to describe the per year price rise in a basket of goods and services that an average individual needs on a daily basis. Just yesterday the Consumer Price Index or the inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More indicator for India, came in at 6%.

A one-year fixed deposit at leading banks is currently giving you 5%-5.5% a year and money left in your savings bank is giving you 2.75% a year.

We haven’t even applied tax on these figures. Be rest assured that money lying in bank deposits is losing value not gaining anything

4. Insurance is not investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains...

We have already written a lot about this. Essentially insurance is something you take to ensure that your family is protected monetarily in the event of your untimely death. Unfortunately, there are many insurance products in the market which combine an element of investing but masquerade purely as investments.

However, you end up paying huge charges for the insurance component which are also deducted from the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... component, thus immediately reducing your return as you begin paying for this so-called investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains....

Just avoid it.

Read this blog if you want to know more.

Investing is about creating wealth through assets which will grow in value over time. Growing value means multiplying the worth, either because the profits generated from the underlying business you invested in is also growing or because the demand for the asset you hold is growing at a pace much faster than the supply.

Real estate – residential and commercial, equity shares, corporate bonds and other assets which have a value that can potentially grow because they are able to generate some real demand and real profit are investments you can use for long term allocation and long-term wealth creation.

Summary…

Investing is important but so is starting right. Lot of us have the wrong idea of what constitutes an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains.... Before you begin, just understand that trading in shares, buying on tips, bank deposits and insurance are not investments.