What is Investing?
Investing is putting your money into something today with the hope that it will grow in the future. But there’s no guarantee — you could earn money, or you could lose it. That’s why you should only invest money you can afford to lose. Financial instruments are the main ways people invest:
- Stocks: Buying a share of a company. If the company grows, your share can become more valuable; if it struggles, you can lose money.
- Bonds: Lending money to a company or government. They pay interest, but there’s still some risk of losing your money.
- Mutual Funds: A pool of people’s money managed by experts who invest in many stocks or bonds at once. Spreads out risk.
- ETFs (Exchange-Traded Funds): Similar to mutual funds but traded like stocks on the market. Can spread risk across many investments, depending on what the ETF holds.
Choosing Where to Invest
I think the question of where to invest—stocks, bonds, mutual funds, or ETFs—really depends on how much risk you are willing to take. It also depends on when you will need the money and how much loss you can afford.
Here is a simple comparison. These are broad descriptions, because the risk depends on the particular investment you choose.
| Type of financial instrument | Risk |
|---|---|
| Individual stocks | Generally high, especially if most of your money is in one company. |
| Mutual funds | Varies depending on what the fund invests in. A fund holding many different companies spreads company-specific risk, but can still lose money. |
| Bonds | Ranges from relatively low to high, depending on who issues the bond and its terms. Even government bond prices can fall. |
| ETFs | Depends on what the ETF holds. A broad stock ETF, a bond ETF, and a gold ETF have different risks. |
Mutual funds and ETFs are not automatically safer just because they are funds. What they invest in matters.
Let’s start with stocks. If you put your money into one company, you are taking a concentrated risk. Your investment depends on how that company performs, but also on what people expect and how they feel about its future.
I know this can be confusing. Say, for example, a company is doing well. People may want to invest in it because they expect it to grow. They buy its shares hoping the value will increase and they can make a profit, or receive part of its profits through dividends.
Then something bad happens in the company’s management. People may think, “There is going to be a big problem in this company. I had better take my money out.”
They want to protect themselves, so they become willing to sell at lower prices. Buyers may also become unwilling to pay as much. The share price falls, and when you look at your investment, you may see a loss.
So people’s emotions and expectations can have a big effect. But it is not completely dependent on emotions—the company’s profits, financial health, and growth prospects matter too.
Then there are mutual funds. Instead of depending on just one company, your money can be spread across multiple investments. In an actively managed fund, a fund manager chooses those investments. Other funds simply follow an index.
This does not guarantee that your money will always be safe. But a fund investing in many different companies reduces your dependence on any one of them. If the whole market falls, your fund can still fall too.
I personally go for mutual funds, and there are different types with different levels of risk. You can find more details in my article, Types of Mutual Funds.
Now, bonds. This is tricky too. Some bonds in India may appear quite stable, but that does not mean all Indian bonds are safe or that RBI regulation prevents losses. Government bonds have very low credit risk in domestic currency, while corporate bonds depend on the company’s ability to repay you. Both can have changing market prices.
When I look at foreign bonds, I also see ups and downs, including years when they lose value. One reason is that when interest rates rise, existing fixed-rate bond prices generally fall. This happens in India too.
Holding an individual bond until maturity is different from selling it early or owning a bond fund. If the issuer pays as promised, you receive the bond’s face value at maturity. A typical bond fund does not promise to return your original investment on a particular date. So yes, bonds can be risky too.
Then come ETFs. For these, I can give you the example of a gold ETF. Its value mainly follows the price of gold, although fees and tracking differences affect the return.
One advantage is that instead of buying physical gold, you can buy ETF units through the stock market, much like stocks. You do not have to store the gold yourself.
But believing that gold will remain valuable is not the same as knowing its price will keep increasing. Gold can fall in value too, and a gold ETF can lose money.
Personally, I feel a gold ETF can be a good alternative to physical gold if my goal is to invest rather than wear or keep the gold itself. I find it more convenient, but I would not assume that it will always grow my money.
Why Invest?
Investing is mainly to fight inflation — the gradual rise in prices that makes your money worth less over time. Inflation is specific to the country you live in. Investing gives your money a chance to grow faster than inflation, but it’s not a guaranteed way to get rich. If you want to make millions, you will need to build a successful business, but hey, that's risky as well! In the end, it's all about how much risk you are willing to take and being smart enough to know how much risk is enough.
How to Invest?
Investing is now easy thanks to stock brokers. They help you buy and sell financial securities like stocks, mutual funds, etc. through their platforms. More about stock brokers in the next post.
Key Rules
- Only invest what you can afford to lose, because nothing in investing is certain. You might get stuck into a spiral watching the "success" stories of investing on Youtube and thinking it's just simple maths "buy when its value is less and sell when its value is more". Always remember that it's your hard-earned money.
- Money shouldn't be your goal in investing. You should be clear about what you plan to achieve with investing, it could be for your retirement, wedding, buying a vehicle, etc. This will help you choose the right financial security.