Must Do’s  Before you Invest

Must Do’s Before you Invest

Evaluate your Current Financial Situation

Before you think of investing, get a clear picture of your present financial status. List out the entire reservoir you have such as salary, bank savings or investments like shares or unit trusts. Also make a list of financial obligations such as debts you owe, household expenses, credit card balances, taxes, insurance premiums and so on. Assessing your current financial health will help you get a better idea of where you are and where you want to be financially.

Assess your Risk Tolerance

According to experts, risk and reward always go hand in hand. That means, if there is no pain then there is no gain. Every investment is subjected to a certain degree of risk. Generally, higher the risk, higher is the potential return. If you have a long term financial goal, you are likely to get more potential return by carefully investing in asset classes of high risk like stocks and equity funds rather than restricting your investments to less risky assets. Risk tolerance can be assessed with the help of questionnaire tools available online. Knowing your risk appetite helps you choose the proper mix of asset classes. 

Determine your Financial Goals

Setting a financial goal is a crucial part of financial planning. Figure out your priorities and understand your investment objectives before you draw a plan. Think about your children’s education, marriage and your retirement life. Consider your future plans such as buying a property or a new house, starting up new business etc. Keeping your age and risk appetite in mind, fix up a time frame and value target for each goal. Prioritize your goals and start saving accordingly. 

Understand Investment Products

Once you are clear about your financial goals, next key step is to choose the right investment product. To make it work for you, you need to have clear understanding of the particular investment product. Being familiar with the intricacies of the products will help you achieve higher profitability along with accomplishing your objective. For instance, if you are looking for both life cover and potential return on investment, you can opt for ULIP (unit linked insurance plans). However, if you are looking for pure insurance plan, you can go ahead with a simple term insurance plan, which can cost you much lower. When you understand the product, you can make the right choice based on your need and risk appetite. 

Apply Diversification

Do not put all your eggs in one basket and if you have only one egg, find the safest basket within your reach to put it in. Spread your investments into various asset classes specially the ones that are not correlated. Diversifying the investment portfolio helps you strike a balance between risk and return. Have a proper mix of various investment instruments such as direct equity, mutual funds, bank deposits, bonds, Gold ETFs etc. based on your risk taking ability, investment time frame and the value requirement. Following your investment strategy is the key!

Consider Tax Implications

With the variety of tax sheltered and non-tax sheltered alternatives available today there are ample opportunities to create an investment plan to minimize taxes. Think about how this investment fits into your tax strategy.


The Bottom Line

Draw a financial roadmap, set your goals and choose the right mix of investments to achieve them. Consider your risk taking ability, return expectation and liquidity requirements before you get started!