There is a famous quote by Benjamin Franklin: “An investment in knowledge pays the best interest.” So, true!
The sole purpose of investing is to meet your financial goals and secure your future. However, financing your hard-earned money without any prior knowledge can cause you a significant loss. That is why it is crucial to go through certain dos and don’ts before you put all your money into some fixed deposits, shares, or mutual funds.
Moreover, investment comes with a risk – low, medium, or high. How much risk appetite you have is another thing to think about.
Having said that, in this blog, we will assist you in the best way possible by sharing the ten must-follow vital factors that will guide you through the various types of investments with the least amount of risk of loss.
So, let’s dive into them.
Investing: What Do You Need to Know Before You Start?
What are Your Investment Goals?
While it is true that the end goal of investment is to obtain a secure future, different people start investing with different objectives. So, ask yourself, what do you hope to gain from your investment? Are you financing it for your studies, home purchase, or wedding. Some are even looking for ways how to save money for their business. Because this will serve as a roadmap for how you should proceed.
For example, this will include your mode of investment, lock-in period or fluidity, your monthly installments, the rate of interest, and others. So, first things first, set your goal, be it short-term or long-term, and then take the next step.
Take a Financial Assessment
Before you begin investing, you must thoroughly examine your financial situation in terms of liabilities, assets, lifestyle choices, and cash on hand. Yes, you will have to make some sacrifices when you start paying your funds in monthly installments, but not at the expense of your basic needs. What you need to cut back on are extraneous costs such as junk food consumption, binge-watching, binge-shopping, or just an excess of anything. So, conduct a thorough investigation to see where you can save money and invest it in the many forms your favor.
Conducting Market Research
It is no secret that investment is tricky and risky, especially when you are a rookie and trying to understand the basics. As a result, it is always prudent to conduct extensive market research before investing in any mode. Doing so will give you a deeper insight into the current market situation (i.e., how volatile the market is, which can majorly impact your short-term or long-term investments) or what companies you should invest in.
So, if you are investing in any volatile place, the investment research will show you the current trends and will save you from the potential risk it could cause if it has not been done previously. Moreover, you can even sell your already invested shares, take your money out, and make profits before a company goes into losses. So, make sure you keep up yourself with the financial world.
Know The Risk
- One, it is critical to understand the risks associated with your investments.
- Second, how much risk you are willing to take, or, in simple terms, your risk appetite.
In the financial world, the term “risk” is linked with the likelihood of losing money due to unforeseen situatIions. Simply put, the higher the risk, the higher the return will be. Consider the examples of fixed deposits (one of the traditional forms of investment) and the stock market (extremely volatile).
So, if you are someone who wants to keep the principal amount the same, go for the low-risk investments. But if you are looking for some higher returns and are willing to take some potential risk, you can invest in high-risk funds or in the stock market.
Investment tenure, or investment period, is defined as the total time frame of your investment. Depending on your personal needs, you can choose from a short-term (less than two years), medium-term (between 2 and five years), or long-term plan (between 5 and 10 years, and sometimes even more).
Basically, the length of the investment period is directly linked to your return on investment. The longer the period you choose, the higher will be the profits. Here comes another piece of advice. Keep in mind that not all long-term investments guarantee the same. So, make sure you first read all the terms and conditions that apply.
Liquidity (Easy Cash Flow)
In old times, people always used to carry cash along with them, mostly in their home lockers. The reason for this is that it could be easily accessible in the event of an emergency. This is called liquidity. But this is not the scenario of today. Not only is it unsafe to keep (from the stealing perspective), but it also deteriorates the value of your money (ah, the inflation).
This begs the question of how you would protect your finances in an emergency. This is why, when making investment decisions, it is crucial to consider a type of fund where you can easily retrieve your money at any time.
Your savings account, for example, is highly liquid in terms of cash flow or shares that can be easily sold to obtain money. Nowadays, there are platforms that offer a similar rate of interest with full liquidity, like FD. You can also invest in them.
This is the pain point of every common man. With every year that passes, there is a continuous rise in the price of basic goods and services, which directly deteriorates the value of money. This is called the inflation rate. It has a welcomed impact on the national economy and indirectly on your investments.
In the United States, for example, the inflation rate has risen to 6.5% in December 2022. Now, if you live there and make whatever investment you want, your returns must be greater than 6.5%; only then will it be considered profitable. Or else you are going into a deep hole.
Inflation rates have had a greater impact on the real estate and stock markets than on general consumer needs. So, make sure you finance your money by keeping the future inflation factor in mind.
Know the Taxation Guidelines
When making any investment choice, it is essential to examine taxes guidelines as well as prospective tax ramifications that may occur in the near future. The basis for this is that various investments result in varying taxes rates, which might have an impact on your investment results.
Quite often the taxing aspect is missed, and we are surprised when we see the net-after-tax return. As a result, before making an investment, it is crucial to comprehend the tax rules and guidelines. Furthermore, understanding taxation policies can help you make wise investment decisions, therefore protecting your financial life.
Don’t Get Taken in By Volatility
Volatility is a metric of how much a certain investment or market fluctuates between highs and lows. The annualized frequency distribution of returns is used to express it. Volatility, in layman’s terms, indicates that the price of investment might swing dramatically in a short period of time. This may be extremely dangerous for investors and frequently causes worry.
Broadening among various types of equities and asset categories is one strategy to help minimize portfolio volatility. This may be accomplished by constructing a very well portfolio of equities, debt, property investment, and commodities assets and employing suitable stake-sizing procedures.
How Much Return on Investment (ROI)?
While making a fruitful investment decision, it is vital to consider the final expected return on investment after doing all profit-loss calculations. After all, this is why you started it in the first place. But how will you do it?
Check the average annual rate of return of any investment. Every year, observe the rise and fall of the financed value. This will give you an average glimpse of what you can expect from this investment over a given period of time. For a rookie, it might look tiresome, but after going through a thorough examination of past returns, you will get a rough idea of it.
Moreover, there are various factors that are associated with it, like the type of investments, how long you are planning to invest, the inflation rate, and the tax implications.
Taking mindfully financial decisions is critical to long-term success. By taking into account the elements listed above, you’ll be well on your journey to making intelligent decisions that will enable you to accomplish your investing objectives.
However, there is no fixed mantra for successful investment. But there are suggestions, and based on our experiences, we suggest you do the following:
- Start investing your money at an early age.
- Maintain a constant awareness of the market.
- Never let your emotions come across in your investment decision.
- Always diversify your money.
So, now that you know the fundamentals, start financing your money before it’s too late.
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