Investment should be a must have if you dream to become financially independent. Once you realise that your finances are stable, you are to initiate investment. If you invest regularly, you will become financially independent eventually. But before you start investing, you have some homework to be done. There are a few things which should be in consideration before you take your step ahead towards investment.
Things to Do Before You Start Investing
Know the Objective of Investing
Whenever you start an investment, be assured that your investment is objective oriented. When you have a clear picture in your mind on the returns of the investment, you can sort out the right investment instrument and of course the right amount you need to invest. Sometimes you may want to grow your money faster irrespective of the exposure to the market fluctuations. In some other cases, you may want to keep your money safe even if the return is comparatively low. In both cases, you need to invest in different instruments.
The objective of the investment also includes the span of time you want to get invested. The investment vehicles are available for different time frames from a very short time to a very long time. So according to the time you want your returns, you should choose your investment plan.
Consider Your Age
The age of the investor is a very important consideration when it comes to investment. In investing, the younger you enter better will be the returns. When you are young or at the initial stage of your professional life, you must consider investing at this stage only. As your responsibilities are less towards your family, you can invest in instruments which include more risk but better result. Another advantage of starting investing early is being young, you have more time to compound your returns. Moreover, your retirement is quite far, so building a good corpus for retirement is possible if you start investing early. In the same way, if you are a middle-aged person, your responsibilities are more towards your family and less time left for your retirement. So you should invest accordingly. Hence the age of the investor is a determinant of the time span you want to be invested, the risk profile and the amount you need to invest.
Find Your Risk Tolerance
The risk to market exposure is the next thing to keep in consideration before you leap into any investment. There are some investments which are high risk associated but the returns are also high. In the same way, some investments give you near to assured return, but the returns are relatively low. So you are to gauge yourself how far you can tolerate the market risk. Every investor is not comfortable with the ups and downs of the market. If you are such an investor, you should better opt for FDs or bonds where the market risk of almost nil. But if you have fund with which you can take a risk of losing, you can invest in stocks or share market. But the ground rule is that the investments with higher risk fetch have better returns than the lower risk investments.
Understand the Financial Products
The financial products are abundant in the market. Different products come with different features, benefits and risk profile. However, understanding all those investment instruments may seem to be complicated in nature. Before you add any of the instrument in your investment portfolio, be assured that you have learnt everything about that instrument. Being aware of the intricacies of the products will make you reach your goal without any deviation. Whenever you choose any product, be assured that your invest instrument is oriented with your goal, age and risk tolerance.
Get Debt Free
The investment is the step which has to be taken only after you become free from most of your debts. Some of the debts such as a personal loan or credit card debts are very costly in nature. If you have any loan which has an equivalent interest in your return of investment then there is no use of investing. For instance, let’s say, you have a personal loan with the interest rate of 12% and your return on investment is 13%. In such situations, it would be more sensible to pay off the loan prior to start investing. But if you have a home loan on the interest rate of 9% and your return is 13% you should continue both. In this way, you can gain more than you are paying as an interest component of the home loan.
So, if you have any loan which has interest rate equivalent or more than the return of the investment, it is better to pay off the loan before you start investing.
The Bottom Line
Taking investment decisions considering all facts like your goal, risk, age etc are certain to give you the result you desire to have in future from the investment. If you are still not assured, you can always take help of investment experts to guide you to create your investment portfolio. Whether you choose your investment instruments by yourself or take help of experts, just be assured take you are making informed decisions.
