What care should YOU take while investing?
Understand the investment product
Whichever investment product you go for whether stocks, Mutual funds. FDs, real estate, make sure that you understand its intricacies and the risks involved. For example FDs which are normally considered safe, have the risk of giving lower return than the inflation rate which will imply that you end up having negative return. Let’s say your FD gives you a return of 8% per annum whereas the inflation is 10%. That means your FD gives you -2% returns. Similarly you should also consider you time horizon while investing. If you have shorter time horizon less than 3 years, you should invest in debt oriented products. On the other hand if your time horizon is longer you should consider investing in equities through mutual fund route. Investing directly in equities is best left to the experts and professional. Other important point to consider while investing is you should consider your risk profile and risk tolerance. Will you be ok if the markets go down tomorrow or will you lose your sleep over it? If you consider all such factors you improve your chances of winning in the game of investing.
Understand the costs and benefits
You must know the costs and benefits of your investment. Most of the investments have certain charges involved. For example, mutual funds charge management fee to manage the fund. Similarly if when you buy or sell stocks, you pay the brokerage, STT, stamp duty etc. All these charges affect you rate of return. Other thing to keep in mind is the opportunity cost. Opportunity cost in general terms is defined as the cost of an alternative that must be foregone in order to pursue a certain action. Similarly opportunity cost in investment term may be defined as the difference in return between a chosen investment and one that is necessarily passed on. Let’s say you invest in a bank FD and earn rate of return of 8% whereas similar investment in mutual fund yields 10% return. So in this case the opportunity cost is 2%.
Know the liquidity and safety aspects of the investment
Liquidity means cash or cash equivalent. It means how easily you will be able to liquidate your investments at the right valuation if any such need arises. For example real estate investments are quite illiquid asset class as you may not be able to sell it quickly or get the right valuation as well. Similarly, equities are very easy to liquidate but you may not get the right price in bad markets. This is a very important point to keep in mind while going for investment. Similarly you should know the risk factors associated with your investments. Risk factors include liquidity risk, market risk, business risk, political risk etc.
Diversify your investments
There is very famous saying that you should not put your all eggs in one basket. And nothing can be truer than this as far as investing is concerned. In fact diversification of your investments can be one single most important critical factor that will determine your success or failure as an investor. Most people either go for too risky investments or too conservative investments resulting either losing the money or earning far less returns than what they could have achieve with right kind of mix of investments. You should have the right mix of equity and debt investments in your portfolio to get the optimum returns out of your investments.
Do goal based investments
You must have a clear purpose before putting your money into any investment e.g. whether your purpose is capital protection, regular income or higher returns from your investment. Similarly your investments should be able to meet your future needs, goals and aspirations. For this purpose, you should do proper financial planning. Financial planning not only takes care of your day-to-day needs but also offers you the security against uncertainties and emergencies and helps you to meet your future financial needs. These days there are professional financial planners offering their services at a very reasonable fee. A professional help can make a huge difference in the quality of your financial health and the results you get from your investments.
Be Smart & Intelligent With Your Money.
Your Life! Your Money! Your Way!
Source: YourMoneyYourWay.in
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