Investment is not a one-step process but an entire series of steps taken to reach the financial goal. It encompasses making various financial decisions and finding the right investment alternative while minimizing any associated risks. Investing is affected by a large number of factors, so it is crucial to keep in mind some financial aspects. Today we will talk about five things you should consider before you leap.
Know Your Investment Goals
Every person who is desirous of investing should have a stated purpose of investment. It could be anything like buying a house, new car, child education and marriage or planning retirement. You should know what you want to save your money for and especially how much you want to save. Your investment goals are a crucial factor to decide the investment alternatives.
Know Your Financial Condition
Any investor, whether she is a billionaire or a new associate in a law firm, has some financial limitations. It is necessary to know how much would you be able to invest in the said period of investment. The purpose of investing funds would be to generate sufficient returns to help you achieve your financial goals, whatever they are. So, it is necessary to know how much investment you would be able to support and where you can cut corners.
Know the Importance of Emergency Funds
One of the main reasons why investments fail is that people consider their investment as emergency funds. However, this is never the case. For example, when you start a fund for buying a new house, then that money is being kept aside for buying that new house only. Now, what people do is that whenever they face any financial emergency, they break these funds, thereby hampering the investment cycle. Such acts lead to lower accumulated wealth. These emergencies, as the name suggests sprung anytime and you have no control over them. So, it is always advisable to consider an emergency fund. It would safeguard you in case of any mishap.
Know Your Asset Allocation
There are various investment avenues available in the market. You can invest in precious metals like gold & silver, stocks, bonds, mutual funds, real estate or a combination of all of the above. You may or may not want to invest in all of them. Each of them has its risks, rewards and characteristics. Therefore, you should be well aware of the investment avenues you have selected. Knowing each kind of investment avenue helps you to create a diversified portfolio and enhances your chances to reach your financial goals.
Know Your Risk Appetite
When someone wants to invest his money, there are majorly only two things in his mind. First is the reward and second is the associated risk of investment into that avenue. Every person has a different risk appetite depending upon his age, financial situation, priorities, etc. You should identify the level of risk you are willing to take to achieve your financial goals. This factor is one of the main aspects when you choose your investment avenues. People who have a high-risk appetite go for equity funds; they are risky but give good returns to its investors. Debt mutual funds are safer but provide low returns and are suitable for people with low-risk appetite. Hybrid mutual funds are known to yield better returns than debt funds and are less risky than equity funds, so they are suitable for moderate risk-takers.