Now, the easiest way to make your money while you sleep is by investing. However, if the investments are not done in a planned manner with a proper objective in mind, it can even jeopardize your financial future.
So to help you invest in the right manner, in this blog, we will talk about the things that you need to be mindful of before you start investing.
Here are the 5 things that you need to consider before investing
1: Know your investment goal:
There are many things that we want to buy or do in our lifetime. For example, we want to buy a house, a car, travel the world, gift our parents an expensive watch or a piece of jewelry. Now, most of these dreams can be achieved by turning them into investment goals; and then figuring out how to attain them in a timely manner.
There are many goals that are common to all like saving for retirement, saving for one’s child education, etc.
So, the first thing that you need to determine is what you are investing for. And then, exactly what is the amount of money that you would need to achieve that goal. For example, you need Rs 20 lakh for making a down payment of a house.
2: Know your investment timeframe:
Once you are clear about your investment goal, for example, saving for your child’s school admission. Then you get an idea about by when you need to achieve that goal. Say your son/daughter is 2-years-old, then you know you would need to save that money within one year. And knowing the timeframe of the goal will help you understand whether it is a short term goal, a midterm goal, or a long term goal.
For example, a goal that needs to be achieved within 3 years can be categorized as a short term goal. So if you are planning a cross-country trip across eastern-Europe in one year, and you are saving up with that goal in mind then it is a short term goal. Then, a goal that is 3 to 5 years away, like saving for the down payment of a house, can be classified as a midterm goal. And long term goals are those which are more than 5 years away, like saving for your children’s higher education, their marriage, etc.
Once you are aware of the timeframe, it will help you determine where you should invest your money and how much you should invest to achieve that goal. This will also help you to stay focused on the goal. Since you know being irregular with your investments can result in a shortage of funds, you will remain disciplined with your investments.
3: Know your risk tolerance:
Every investor needs to find out his/her own risk tolerance. Some products can give higher returns than others, but there might be more risk involved. For example, mutual funds usually provide higher returns than FDs but being market-linked they are riskier. Decide whether you have the stomach to tolerate that risk. Taking more risk than you can tolerate can give you sleepless nights which can eventually make you stop the investment before achieving your goal.
For example, say you invest in a mutual fund with a 5-year goal in mind. Now in the 3rd year, the markets fall and so does the value of your mutual fund. The losses that we see during such times are paper losses, i.e. the price of the investment is currently lower than what the price was when you bought it. And it would again go up. However, you unnecessarily stress over it and redeem your mutual fund units. And the moment you do that, the paper loss turns into a real loss. And due to this loss, you might not be able to achieve your goal in a timely manner.
So never invest in something which you feel is riskier than your risk tolerance level and you might stop investing in it midway.
4: Know your asset allocation:
Different asset classes perform well at different times and hence if you have different asset classes in your portfolio it will ensure that investments are well-cushioned all the time.
For example, the return from gold remained low for a long time before going up since last year. Meanwhile, equities were delivering amazing returns before they crashed during the pandemic; however, during that time gold continued delivering great returns. Now, as an investor, if you have different asset classes in your portfolio, if one asset is not performing well during a phase, the other well-performing asset at that time would cover the loss.
But how much you want to allocate for each asset class will depend on your risk appetite and not how much return it is generating at the moment.
5: Know which product to invest in:
Finally, you have to zero in on the product you want to invest in as per your investment goal. There are two things that you need to be cautious about while selecting an investment product – first, it should be as per your risk appetite and second, it should be as per investment tenure.
For example, say your son/daughter is two years old and you need Rs 2 lakh in a year’s time for his/her pre-school admission. This is a goal that can’t wait and you need the exact amount at the time of his/her admission. Here the focus is capital preservation and accordingly you will have to choose your investment tool. For example, for this goal, you can invest in FDs on ETMONEY and earn up to 7.35% p.a.. Since it comes with the assurance of a guaranteed return, you know exactly how much money you will receive at maturity.
Meanwhile, you also want to start investing for your child’s college education, a goal that is 16 to 17 years away. Here the focus should be earning inflation-beating returns, and accordingly, you should zero in on a financial instrument. To save for a goal like this, you can invest in Mutual Funds through SIPs.
The objective for each investment is different, so should be your investment tool.
Having the intent to invest is a great thing, but it loses its purpose if the goal, the investment tenure, and the financial tool for investments are not clear. So even before you start investing, try to find out these few things – why you are investing, for how long you would be investing, your risk tolerance etc. These steps will help you achieve your investment goals seamlessly.
This Content has originally written by ET Money Team and published on October 6, 2022.
No Copyright/IPR breach is intended.
Click Here to read Original.
Photo by Ibrahim Rifath on Unsplash