1. To have a huge retirement corpus: One of the primary objectives behind investing is to have enough savings to sustain themselves at a point in life where they aren't capable of working regularly and earning money, i.e. post-retirement. Consistently investing over a long period helps you accumulate a colossal corpus by the time you retire.
2. Risk-averaging: If you start investing at a very early stage in your life and keep on doing that for several years constantly, the risk is spread out over a more extended period. So all the short-term fluctuations in the markets and prices of securities don't really affect you as in the long term, they average out, minimising the risk to a great extent.
3. Higher returns on long-term investments due to compounding effect: Compounding effect is nothing less than pure magic! Investing ₹500 every month from the age of 20 can end up in Crores by the time you're 60 just because of compounding. Seems too good to be true-doesn't it? Well, it is a reality, and a significant reason so many people decide to invest.
Very briefly explaining what exactly is Compounding? - Let's take an example. You invest Rs. 1000 annually and earn an interest of 10% (Rs 100) the first year. Next year, you will earn interest not on ₹1000 but instead on ₹1100 (principal+interest from last year). This keeps going on for however many years you've invested; by the time your investment matures, the sum you receive will be more significant than your initial amount invested!
Few things to keep in mind while investing:
1. Identifying your objective: There are primarily 2 types of instruments to invest in, debt and equity. Debt is basically like giving a loan to a company, and therefore you earn a regular fixed interest. On the other hand, equity gives you ownership of the company, and consequently, you get dividends from profits made by the company. So if you are willing to take the risk- equity is a better place to invest. However, if regular income is what you're looking for, debt is a better fit.
2. Following herd mentality: This is an absolute no-no. Just because your friends or family are investing in a particular company or security, don't get carried away by that herd mentality (Staring at LIC IPO). Carefully try to understand any security you're considering investing in, and only if everything sounds good, go ahead with it.
3. Don't jump into the market without prior information: It is well-known that financial markets are incredibly volatile, and numerous companies suffer deathly losses and humungous profits every day. Therefore, having adequate market information before investing is very important to make wise investing decisions, instead of straight up jumping into it clueless!
4. Maintaining an investment portfolio: Diversification is the key to successfully making money through investing. Therefore, making an investment portfolio containing different securities (both debt and equity investments) is crucial. This is important to minimise your risk and maximise your returns and save you from market volatility.
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