How To Be A Smart Investor?

A smart investor follows three simple rules – use benefits of compounding, think like an entrepreneur, and avoid debt.

Any investor has to keep certain principles in mind. While it is important to seek the guidance of a professional financial advisor and to understand as much of the market as possible, it is equally vital to understand certain other principles.

Any investment you make is going to earn compound interest. That means that your interest is going to earn interest as well, and not just the principal. So if you invest Rs. 100 at 10% per annum, it is going to become Rs. 110 at the end of the first year, Rs. 122 at the end of the second year instead of 120, Rs. 133 at the end of the third year and so on. The more regular and more long-term your investments, the greater the benefits that you would reap. So Systematic Investment Plans (SIPs), especially ones referred to as perpetual SIPs, really capitalize on the compounding benefits, provided you invest for a long period of time.

Second, when you invest in a company, the company is working for you. If you invest in Reliance Industries for example, you are a stakeholder in the company and this means that Mr. Mukesh Ambani is working so that you can share in the profits. It is important therefore, to invest in the right kind of companies. Put yourself in the shoes of an entrepreneur and ask yourself which companies have the most growth potential and can benefit the most from your investment in them.

Third, avoid long-term debt. Everyone wants certain luxuries in life and so we end buying what we want by using debt instruments. Houses are bought with the help of loans and credit cards are swiped to the limit. Debt, however, accumulates interest too, just like your investments do. In many cases, the interest you pay for your debt ends up being higher than the interest you earn on your investments. So to see the most returns on your investments, foreclose your loans and avoid incurring more debt in the future.

Finally, have an efficient and knowledgeable financial advisor, and listen to them!