Investments imply putting aside your savings into equity, mutual funds, real estate, commodities or business with an intention of capital appreciation (wealth accumulation) over a pre-set tenure (short, mid or long) which is based on individual preferences.
Investments are great tools for growing and accumulating your money. However, it is important to keep some basic things in mind before making investment. Given that it is not possible for someone else to define your goals and choose an apt option for you, we list some key pointers which will help you in your investment judgment.
Draw a personal financial roadmap – Assess your financial situation.
It is vital that you evaluate your financial state of affairs in terms of liabilities, priorities, lifestyle choices, income, etc. While it is essential to instill certain levels of compromise in order to invest, it is never sensible to over-squeeze your expenses beyond comfortable levels. Analyze thoroughly and based on your cash inflow, define the frequency and type of investments.
Identify your Risk Appetite – Evaluate your comfort zone in taking on risk.
This is another very important factor you should consider before making an investment. The general rule is the higher the risk of an investment, the more potential there is for higher return. However, not everyone can tolerate risk or take risks with their money over a certain level. You need to understand your threshold for risk and the level to which you can take risks with your money before making any kind of investment. This is to avoid the adverse of effects of risk taking on your life and health. It is thus best to invest within your level of risk tolerance.
Define your Objectives.
This is a crucial point to consider before you foray into any investments. Your goal can be short-term money accumulation for basic needs like buying a car or saving up for the down payment of your home, etc.; or long-term like retirement planning, children’s education, etc.
Investment Distribution – Consider an appropriate mix of investments.
Never risk your entire corpus towards a single investment option. If opting for mutual funds analyze the current market condition and distribute your investment across segments or areas. This will help manage risks and ensure potential returns.
Perform an Individual-level Analysis.
While we understand that reviews and suggestions are important, understand that these alone cannot settle on your investments. On no account rely on friends, recent news or expert advice on television channels and blindly risk your money. There is no easy money and there is no ready-made choice. You need to base decisions solely on your needs subsequent to detailed scrutiny at an individual level.
Consider Mutual Funds Investments.
This is an appropriate choice for naive investors since these are professionally managed. They come with several attractive features like diversification which help manage risk levels while maintaining potential returns. Opting SIP (Systematic Investment Planning) is most advisable since it regularizes savings and inculcates discipline within an investor. Derivatives are not investment instruments and so avoid them.
Stash some Emergency Capital and Never Borrow – Create and maintain an emergency fund
Investing entire amount towards liquid funds over long-term is not an ideal decision since you have to always be prepared for any cash emergency in the short run. By no means take loans for investments. Understand that these are risk-associated mechanisms and by borrowing capital you are adding substantial burden to your financial arrangement.
Be Warned for Chit Funds – Avoid circumstances that can lead to fraud
These days there are countless bogus investment options available. Do not fall prey to fancy sounding promises. Make your decisions wisely.
The Time to make the Investment
This is one of the most important things you should consider before investing. You need to consider if it is indeed the right time for you to invest. There is no hard of fast rule to this but it basically just involves you being observant enough to know the right time to make your investment. You can as well consult a financial advisor for this, and you can also employ your sense of good judgement in making the decision on the right time to invest.
Scrutinize Investments Regularly – Consider rebalancing portfolio occasionally
Keeping a track of your portfolio helps you identify the investment areas that are not working. Nonetheless, one should be careful while switching funds; only switch funds from one investment to another if the latter option has not worked well repeatedly for a longer span of time (and not just for a quarter or two).
Be a Critic of your Investment Decision
After identifying and prior to implementing, wear the hat of a critic and try to write down all the negative impacts associated with the judgment. Evaluating your own choices critically helps to ensure that your study is foolproof and that your decision is wise.
Where to Make the Investment
Many times your objective for investing will determine where you will invest. If your objective for investing is to keep your money relatively safe because you will need it soon, then investing in less risky instruments like bonds will make more sense for you. On the other hand, if the objective of your investment is to take aggressive risks to make higher gains, then you can of course invest in high risk instruments like stocks etc. However, if your objective for investing is to take some moderate risk with your money for better appreciation, you can consider investing in real estate or in a mix of stocks of very stable companies that pays out dividends (income).
The Time Before You Need the Money
Not everyone invests for retirement, some investments have shorter goals. This will therefore influence where you are going to make your investment. Typically, the longer you can stay invested the more you can take risks and hopefully make more gain, since you can still recover from potential losses. However, if you do not have a lot of time to stay invested, taking a loss might be more disastrous to you, it is thus best to make less risky investments or invest in less risks instruments.