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10 Principles Of Investing Money

Investing money is not as complicated as some people make it out to be. Scroll down to know the 10 basic principles of managing & investing money better.


1.) Why should you be investing your money  ?

Instead of just saving it in your regular bank account.

— Every year, inflation destroys the value of your savings ( At the rate of~6% per year )

If you leave your money in your savings account, it earns just about 4% interest and loses value every year on account of inflation.

Your aim should be to beat inflation and grow your money to meet goals.


2.) Are you saving enough ?

To invest and grow money, you need to have money – And that can happen only if you are saving part of your income.

You should aim to save atleast 20% of your income every month.

Apply this formula: Expenses = Income – Savings (i.e Before you spend, take out a certain portion as savings)

E.g. If you earn Rs 30,000, then imagine your income is only Rs 24,000 (after deducting Rs 6000 for savings and investments) and spend accordingly.


3.) Do you have an Emergency Fund ?

Create a liquid fund which is easily accessible – Don’t even think of spending it except in an emergency.

Your emergency fund should = 3 to 6 X monthly expenses.

So if you earn Rs 50,000 pm but spend only Rs 20,000, then the size of your emergency fund should range from Rs 60,000 to Rs 1.2 lakhs.

Save it in a mix of Fixed Deposits (FD) and/or Liquid Mutual Funds.


4.) Do you have TERM Insurance ?

If you have dependants (e.g. old parents, or children)
a term insurance policy will give them a large sum of money if you die.

Ideal cover should be equal 10 to 20 x your annual income.

E.g. If you earn Rs 5 lakhs, you should have insurance cover of Rs 50 lakhs to Rs 1 crore.

Term insurance is the cheapest and most effective form of insurance.

Don’t buy insurance as an investment, especially products like Endowment Plans, ULIPs etc


5.) Do you Invest in the Provident Fund ?

If your company offers you PF, you are already investing in it automatically.
If your company does not offer PF, open a Public Provident Account (PPF) and invest upto the maximum limit of Rs 1.5 lakhs per annum. (You can start small with amounts as low as Rs 500 and increase accordingly)

This is one of the safest avenues for long term investment.

It is guaranteed by the Government
Offers tax saving under Section 80 C
It has a lock in period for 15 years (so you will have a nice chunk of money after 15 years)

Basically, your money grows slowly, but safely over a long period of time.


6.) Are you saving for your Retirement Fund ?

Will your job give you a pension when you retire ? Most likely not.
And even if you are in a government job, the pension amount will probably not be enough.

Start saving for retirement from the day you get your first salary.
Most people start very late in life – Don’t make that mistake

Start investing at least 5-10% of your income every month.

Invest in Equity Mutual Funds via monthly SIPs / PPF
Continue investing till you are 5 to 10 years away from retirement.

E.g. Rs 5000 per month invested for 30 years can grow to almost Rs 1.5 to 3 crores.


7.) Have you Identified your Financial Goals ?

Everybody wants to become rich,
But most don’t know how rich they want to be. Set a target.

You can create significant wealth over your lifetime if you start investing with a plan.

List the goals you want to achieve.
Identify how much they will cost and time taken to reach them.
Start small and increase as your income increases.

E.g. If you start investing Rs 5000 per month when your child is born, you will have about Rs 60 – 70 lakhs by they time they are ready for college.

8.) Having a Diversified Portfolio 

Don’t put all your money in one asset class.
Wait, you are probably wondering what are asset classes ?

There are 4 primary types:

1.) Equity – Volatile but potentially high returns over long term
2.) Debt – Includes FDs, Bonds, PPF etc – Stable but with lower returns
3.) Real Estate – Land, Residential, Commercial property
4.) Commodities – Stuff like Gold, Silver etc


Diversified investments protect your portfolio + enable growth of your money more than inflation

The younger you are, the more you should be invested in Equity ( Ideally through SIPs in Equity Mutual Funds when you start – You can move on to direct stocks once your knowledge and confidence increases )


9.) Taking Advantage of  Tax Saving Investments / Provisions

Savings in tax after investing is almost akin to free money.
Take the maximum possible advantage.

Insurance Premiums, ELSS Mutual Funds, PF / PPF are some covered under Section 80c

If you are in the 10% tax bracket, you can save almost Rs 15,000.
If you are in the 30% tax bracket, you can save almost Rs 45,000.
If you have a house or educational loan, you can get additional benefits

Make the most of this opportunity. Don’t give your money to the government for free


10.) Money Mistakes to Avoid

— Leave money idle in a savings ac.
— Invest using borrowed money (especially to buy stocks)
— Buying Insurance as an investment (They usually have low returns + long lockin periods)
— Trusting a sales / bank agent’s verbal pitch – Get it in writing
— Chasing unrealistic high returns. Chase a target to meet a goal instead
— Buying stuff you don’t really need, but just because it’s on Sale !!


The 10 principles of investing above are a good starting point to invest and grow your money in a planned manner.