Fundamental principles of investing

What is an investment?

Simply put, you invest to make money and save it. Savings usually keep your money in a bank or set it aside so that one can keep a relatively safe and certain low interest rate.However, you may not be able to make money with a savings plan that does not yield long-term profits and because of the long-term effects of inflation, the reality of your money keeps buying.

Investing means that your capital becomes a source of income for you and that there is an increase in capital in the future - it has both benefits for you, namely, the creation of wealth and the preservation of it. Has the potential to be highly profitable in the long run.

It is also important to keep in mind that the value of investments and the income they generate may increase or decrease and the investor's actual capital may sink. Most people invest for a reasonable period of time to make a profit or a positive return - the basis of any successful investment strategy is a clear understanding of your short, medium and long term financial goals because whatever the investment strategy The choice you make is based on your financial goals.

There are many ways to invest - including shares, bonds, mutual funds, real estate, gold, etc. - no matter what method you choose to invest in, but the goal is always to make extra money. It's a simple idea, but it's a very important idea for you to understand.

Successful investment flight - the foundation of discipline and planning

Planning and discipline are essential to becoming a successful investor

Planning involves carefully considering what to look for and tactics to help ease the way.

Set your goals and the duration of your investment
Understanding asset allocation
Look at the investment over time

Discipline means taking into account market fluctuations, recognizing the potential impact of risk, and balancing your portfolio on a regular basis.It is also important that you decide on your expenses within your sources of income and how much you can save before starting an investment plan.

Set your goals and the duration of your investment

Plan what you want to do with your investment and choose the duration of your investment.The duration of your investment will determine your investment choice.People have different goals at different stages of their lives - for example, if you are retired you will want to increase the income you receive - while you are focused on long term goals. Want financial security for yourself and your family.

Whatever your goals and timeline for investing, be realistic about how much you can invest and how well you can manage your investments - if you are unsure about that. It will be helpful for you to consult an expert investment advisor as to which investment will be suitable for you.

Short-term goals

These goals are for a period of less than five years and where you need easy access to your money - for example, planning a wedding dream, buying a new car or renovating your home.

Medium term goals

These are goals that are achieved between the ages of 5 and 10, for example, paying down tuition for your children's higher education expenses or a home loan.

Long-term goals

These are goals that are achieved over a period of 10 years, for example, the full repayment of your home loan or the attainment of your desired standard of living after retirement.

Long term investment

There is an old saying that "time is wealth". This is especially important when you are investing for the long term.

Your financial goals can be to start a business, be a legacy to your heirs or support a good charity - whatever the best way to reach those goals is to invest in the long run.This is because of the effect of compounding force on the investment. That is why over time the effects of improving the return on your investment can be noticeable.

In fact, compounding is the driving force behind long-term investments - it happens when you invest your profits in investments, then invest your profits in investments, and so on.

Decide whether you need income or capital increase or both

Investments are divided into income-generating assets and capital-enhancing assets. You need income from both capital and investments.

Assets with capital increase

They are designed to provide a higher return on capital over time. Increased capital assets include equities and property investments. In the long run, these assets will protect you from inflation.

Therefore, investors who invest for a long period of timeMost of their investments consist of capital-raising assets - the profitability of capital-raising assets fluctuates greatly in the short term, but in the long run they are more likely to yield better returns. The possibilities are-

Income assets

They provide primarily in the form of profitable income, which includes cash investments, bonds and special equities.If you have a basic essential income, then you can make the most of your investment by investing in income assets.To decide which of your investments you need to earn more or grow more, you should consult with a financial advisor to develop your investment plan.

Understanding concerns

When it comes to investing, risk is inevitable - so building a portfolio that you are satisfied with and that gives you better opportunities to achieve your goals requires that you take investment risks and Understand the basics of return - one definition of risk is that the actual return on investment may not be what you expect it to be.There are a number of risks that can affect your investments - you need to understand the potential risks in order to promote your investment plan.

National concern

These risks are local, such as political turmoil, financial difficulties, natural disasters that weaken the country's financial markets.

Currency risk

This risk is caused by changes in the exchange rate of the currency, which in turn reduces the value of your investment.

Fear of inflation

Inflation is a measure of the rate of increase in the general prices of goods and services. The most popular measure in Pakistan is the Consumer Price Index (CPI).

The risk of inflation reduces the value or purchasing power of your investment.

Fear of liquidity

It is possible that you may have difficulty buying or selling an investment.

Market fears

This is the risk that most types of assets pose - what professionals call market risk - market risk is a risk that causes investment profits to fluctuate throughout the market. In which you invest-

Fear of loss

Deficit risk refers to your portfolio that fails to meet your long-term financial goals.

The relationship between fear and profit

There is a simple relationship between fear and profit - the higher the return on investment, the greater the risk. If a person wants to increase his profit and reduce his worries and prefers to get 15-20% profit every year but there is no chance of losing the value of the investment, then the fact is that Such investments do not exist. Under the general rule, the larger the investment, the greater the likelihood of return, the greater the risk, and the longer the investment period.

The ability to accept your concerns and consent will determine the appropriate assets for your investments. You should not invest if you are not aware of the price you are taking.

The balance between fear and profit

The balance between risk and profit is summarized below:

Low risk - The types of assets with low volatility usually have low levels of profit ie low level of profit or loss - since these investments are naturally less volatile, so the return on investment Profit is also low-
High risk - The higher the volatility of asset types, the higher the level of profit or loss - as the investor's profit is more uncertain ie they expect higher potential returns.

Historically, asset types have trends according to their risk level - during a period when investor expectations are better relative to a company or market prospects, then the rate of return on high-risk assets is higher. - Low-risk segments generally perform better than high-risk segments if the chances of capital increase are decreasing.

When the economy and companies tend to grow in a certain period of time, it is expected that high risk assets will perform better in the long run despite all obstacles.

Adopt diversity to minimize risks

Investing your money in a variety of investments is a great way to reduce risk and keep you safe in the event of a sudden downturn in any particular market, sector or individual capital.

With a diversified portfolio of investments, the effects of underperforming investments are eliminated by better performing investments.Diversification does not guarantee that you will make a profit, nor will it completely protect you from falling market losses - but investing alone can save you from severe financial losses - financial advisors With the help of this you can divide your potential risk into different investments.Thus, when some investments do not perform well, other investors carry this burden and help protect you from fluctuations in the portfolio.

Understanding asset allocation

Next heightUnderstand the basic principles of investing in which you can invest your money in a variety of investments to meet your investment goals.

Understand asset allocation

Asset allocation is a key component of a successful investment strategy.With an understanding of investment goals, duration and risk, you can assign assets to your portfolio with the advice of an investment advisor. Include equities, bonds, assets and cash) and how much money you want to put in each one - this means choosing a mix of asset types is your ability to bear investment goals, duration and risk.

Asset types include a variety of securities with different levels of risk, including:

Equities
Specific income
cash
ItemsAsset types include a variety of securities with different levels of risk, including:
only
Property

Each type of asset has different capital characteristics, for example the level of risk and the likelihood of making a profit and its performance in different market conditions - each with different characteristics in a balanced portfolio. Assets are used to try to smooth out the risk of performance fluctuations and imbalances.

Equities are shares that are owned by a company - when you buy equities, also known as shares / stocks, you effectively become the owner of that business - historically other investments such as bonds. Compared to investing in stocks, there is a strong possibility of achieving high returns in the long run, which helps in achieving your long term investment goals.

The value of investments depends on the performance of the stock market as well as other related economic factors which can sometimes increase or decrease the value of the fund and you may not get back the original amount of your investment.

When a company performs well, your share price goes up. When its performance goes down, its value goes down. A good fund manager is basically a good company and the best way to invest in it.

There are two ways you can earn money by investing in stocks:

When you sell shares at a price higher than your purchase price, you get a capital gain.
The company from which you bought the shares, when you receive the dividend dividend, is known as dividend income.

Dividend dividend is actually the distribution of a portion of a company's net profit, the payment of which is decided by the company's board of directors for the shareholders at certain times of the year - this generally represents a portion of the company's profits. The increase or decrease depends on the company's business strategy and performance - the board that governs the company's affairs will decide how much of the profits will be distributed as dividends to the shareholders. How much of the profits should be reinvested so that future growth can be achieved.

If you are an indirect shareholder, any dividends will be paid to you as a shareholder, but if you invest in shares through a mutual fund, then the dividends are paid to the dividend fund - then the fund. The organizers decide to pay their investors an annual dividend.

As a mutual fund investor, you have to make a choice

Want to receive a dividend as a regular income, or
Want to reinvest your profits redistribution

Fixed Income Securities

Fixed income securities include government securities (T-bills, PIBs, etc.) and other debt products (bonds, TFCs) that are usually issued by corporates based on product characteristics. Is paid for a fixed period of time at a fixed / variable interest rate and is refunded at the time of its maturity - a potentially strong predictor compared to other risky types of assets such as shares etc.

Earnings accrue to the investor and are an important element of diversification for your investment portfolio - fixed income securities generally provide unchanging profits and carry less risk than shares. And so they provide lower returns than shares. The value of investments fluctuates according to the prevailing discounted rate, which makes the value of the investment fluctuate.

When you purchase these types of securities you are effectively lending to the issuer - T-bills / corporate bonds / SOCs can be issued by governments or companies - government securities are usually used for public interest projects such as building new roads and schools. The company's corporate bonds / scoops are issued for investment in new business opportunities.

You can earn a return by investing in fixed income securities in the following ways:

You will earn income through regular pre-defined interest payments made by the bond issuer called coupons.
You will receive rental (based on lease) or share in the profits (based on partnership) under the terms and conditions set by the issuer of Sukuk which is known as coupon.

The day the bond matures, also called the 'redemption' or 'maturity' date, you will get back your original investment amount, also called principal amount - after buying a bond you They do not have to be owned until date. Like the shares of a company which are sold and bought in the stock market, they can be bought and sold at any time during the bond period.

The money received by the issuer from the borrowed / purchased sukuk must be returned to the owner of the bond which is called "real money" - it is called "nominal value" or "equivalent value". Also known as' and is determined when the bond is issued - the price of the bond fluctuates between the issue date and the maturity date as the bond is bought and sold on the open market.

Cash

Cash is usually kept in a bank account on which profit is made - among investment products, cash funders have a better rate of return on deposits than in a normal bank account - usually in short-term bonds. Used for investing in what are commonly called "market money products" which are basically banks lending to each other.

Money market instruments

Commodity exchange is one of the oldest forms of trade in human history - commodity buying and selling markets have existed for centuries - commodity-only is a distinctive type of asset that is widely used in general asset types such as shares and bond profits. Nowadays investors have a wide variety of commodity vehicles in the futures market including mutual funds, exchange traded funds or notes, which have a wide range of single commodity based investment sectors and a wide range of investments.

Nowadays the commodity market can provide very attractive opportunities to investors - less relation of traditional commodities to real assets reflects how much better return on investment in commodities - fluctuations in different types of assets are not the same. Which reduces the variability of the overall diversified portfolio - less variability reduces portfolio risks and improves stable profits over time - however diversification does not guarantee this. That there will be no harm at all - due to the effects of commodity prices only commodities can suffer inflation.

Property

Property is a type of asset in a portfolio that provides diversification with unstable income, partial protection from inflation and other investments in the portfolio.

Modern portfolio theory suggests that increasing profits as well as incorporating unconnected assets reduces risks - a multi-asset portfolio (consisting of shares, bonds and other asset types). In the context of, real estate can offer significant benefits as the link between shares and bonds is often poor. Other benefits of investing in real estate are that it is protected from inflation. And the value of the property will increase significantly - as the cost of living increases so will the income.

Investing in property which is a physical asset and the income derived from it is variable - investing in property is more difficult to buy and sell than fixed income securities and shares - however capital in property They do not pose risks to the company's shares or fixed-income products.

Among the major asset types, equities, bonds, assets and cash provide historically high profits in the long run - which is why people who invest for the long term make up a large portion of their portfolio - but Remember that volatility in equities is high.

Keep an eye on market fluctuations

The value of any asset you invest in can fluctuate from time to time.The assets you invest in are affected by economic, social and political events from time to time - but always remember that the nature of the market is that it fluctuates, sometimes quite dramatically - sometimes the market It is impossible to describe the fluctuations until the dust settles completely.

In other words, it is important that you do not lose sight of your capital goal and review today's headlines and market before deciding to change your investment with your financial advisor.You need to remember the adage, "It's time to go to the market, not to market the time" - to market the time so that the investor has a better time - to make a profit. Buying and Selling Wisely - Not as Easy as It Were

Market fluctuations are not easy to control - it is difficult to sell when everyone is engaged in buying - if you sell in a market downturn there is a risk that you will be out of the market when they Climbing - Even for professional fund managers, it is difficult to keep up with the market.

Testing and balancing

You should review your portfolio at least once a year to make sure that the asset allocation is in the right direction.

For example, you may decide to review your portfolio when your personal circumstances have changed, or market conditions have changed - if you do not review your portfolio and consider the current changed circumstances. If I do not adjust my portfolio, there is a risk that you will not be able to achieve your investment goals.

During your review, you may decide to rebalance your portfolio, ie change the ratio of assets - this means selling some investments and buying some others.

When re-balancing you need to carefully understand the implications of costs and taxes - in most cases such as buying equities or bonds, you will face brokerage charges and taxes - in the case of mutual fund sales. You will have to bear the bar and capital gains tax (capital gains) - your investment adviser will work with you to find the best way to rebalance your portfolio.

Three ways to rebalance

If you need a change, you can consider three ways to rebalance:

Dividend reinvestment: You can divide your profits and / or capital gains by diverting the various asset sectors that have exceeded your target.
Further investment - invest in assets that fall short of your target rate.
Transfer - Transfer of funds between different types of assets - Transfer from one sector of assets to another.

Fundamental principles of investing