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, find below 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
#Number 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. And then, there are goals that are specific to each individual, like buying a Rolex for your father, watching the Wimbledon Finals, 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 downpayment of a house or Rs 4 lakh for watching the Wimbledon Finals.
#Number 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.
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.
#Number 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.
#Number 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.
#Number 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.
The objective for each investment is different, so should be your investment tool.