Investment is crucial for everyone because investing can be used as allocating resources with an expectation of growing personal wealth and earning a profit in the future. It involves purchasing assets that see steady growth over a period of time. In this returns are earned through regular income and capital gain.
In order to make the most out of investing one needs to have a clear goal in their mind. Otherwise, you may lose money and never attain your financial goals. Let’s take you through the top 5 things that you should keep in mind before you start your investment.
Table Of Content
- Have a plan for your investment strategy
- Research the market
- Have a healthy mix of investments
- Get rid of your debts
- Have adequate Insurance
Have a Plan for Your Investment Strategy
One of the most important aspects to consider before investing is to make a plan. This way you’ll be able to prioritize your goals and you’ll understand how much finance you’ll need to achieve them. You’ll also understand the best way to achieve them. At the same time, you’ll be far more emotionally balanced and will be able to make sound decisions.
People have the tendency to become emotional. There are times when you may feel like making a sudden change to your investment strategy because of a sudden dip in the market, or a recent update on a market crash that you received from someone.
While these events may have some effect to a certain extent and may tempt you to react quickly. Such as selling some assets, it’s important that you pause and reflect on your investment strategy. If your main goal is to grow your wealth in the long term, then reacting to short-term market fluctuations can greatly affect what you want to achieve.
Generally, you can categorize your plan in short, mid and long terms. For eg: Buying a bike worth 1,50,000 can be a short-term goal. For every goal, you will have a distinct investing plan. At the same time, you will also understand how much income you need to spend on your different goals. Take help from a financial professional if you want.
Also, keep in mind your current financial situation. Understand how much risk you can take. Generally, if you are starting early and you have some long-term goals, you can take risks. If you execute your plan keeping your risks and savings in mind, then you are bound to go a long way.
If you need an expert to plan your investments for you we have got you covered.
Research the Market
It’s critical that you make the effort of researching the market before stepping in. Understand the impact different factors like the central bank rate, will have on your investments.
Understand what’s going on in the domestic and international markets and make informed decisions. This can include things such as GDP, unemployment rates, inflation, and even political situations.
Have a look at what is the interest rate that FDs and government funds are giving and have a look at the overall performance of the stock market. You’ll have a fair idea of what kind of phase the economy is in.
Also, look at the different options that are available to you. Fixed Deposits and shares aren’t the only options that you have as an investor. You can also invest in mutual funds, bonds, debentures and many more.
Have a Healthy Mix of Investments
Your investment portfolio should include assets from different categories of investments so that each of them reacts differently to the market’s ups and downs. This will help you avoid significant losses. Historically the four most well-known asset classes – Equity, Debt, Liquid and Alternate, have not lost or won at the same time. It’s commonly seen that when one asset class does poorly the other one tends to pick up.
When you invest in more than one asset, you’ll minimize the risk of losing your money because the risk gets diversified and your overall investment remains stable. If one investment takes a dip, then the rise of the other one will balance the losses and you’ll be in a position to see positive growth in your portfolio.
Apart from this, asset diversification allows you to have better control over meeting your financial goals. If you miss out on including enough risk in your portfolio then the growth rate will be much lower. For example, if you are planning for your marriage or retirement, it’s most advisable that you make some investments that give you exposure to equity.
Get Rid of Your Debts
Before you start investing money, it would be best if you get rid of all your debts. In the case of personal loans and credit card loans, they charge a high-interest rate. This means that you are going to end up spending money that could have been invested in a good fund. Factor in the future amount that would have been generated and you would see how much money you actually lost and what is the final opportunity cost.
This is why you should pay off high-interest loans before investing if you dream to create a great amount of wealth in the long run. In the case of credit card bills, you should pay the entire amount as soon as possible before they add their interest to it
Also, have the ability to know the difference between a good loan and a bad loan. A good loan will give you additional benefits. For eg. You can own a home with a home loan and make use of tax benefits. An education loan helps you get access to world-class education systems. However, a personal loan that is used to buy an electronic gadget or buy a luxury good can be considered as a bad loan.
Additionally, paying off debt in time helps you to create an emergency fund that is abundant. No one knows when a difficult situation arises and you’ll be in need of some emergency funds.
Covid taught a lot of people that it’s critical to keep some emergency funds with you. During covid, many people lost their jobs and they had to pay for the treatment of their loved ones. If during such a situation you don’t have enough funds with you, it can become a critical situation. It’s a smart decision to keep a portion of your savings as an emergency fund.
According to some experts, you should have at least 6 months worth of savings with you. It would be best to keep your savings in a fixed deposit or liquid fund. They are considered as one of the safest funds and can give more interest than a savings account.
Have Adequate Insurance
Before you start your investment, avail a life and a health insurance plan. Your health insurance should include your family too so that it gives them protection from hospitalization during emergencies such as illness or an accident.
In a situation where you don’t have adequate insurance, if you find yourself in trouble, then you’ll have to use your emergency fund or redeem some of your investment. This can also hurt the chances of you achieving your long-term goals.
It would be best for you to make use of a term life insurance plan as well that would cover the repercussions of your untimely death. Make sure that you are choosing life insurance where you don’t have to pay a high premium and you are getting at least a decent amount of cover.
As per a general rule of thumb, your term life insurance plan should be close to 20 times your annual income. This way you’ll be able to cover your additional liabilities such as a home loan. Then choose an asset allocation that goes in sync with your investment plans and risk tolerance. You should also choose the right methodology to achieve your short-, mid and long-term goals.
In the end, it’s important to acknowledge that any financial goal can only be achieved if you have enough funds for it. However, Sticking to a strategy, understanding the different time durations required to achieve the goal, reaching, and understanding the different possibilities in the market, ensures that you can achieve your goals.
Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
