We must have heard the term financial investments from a lot of people. Investments be it in mutual funds, stock market, bonds, or any other type, are important for everyone. People invest hoping for their money value to increase in near future, giving a good amount of return. These investments are made generally to secure the future. But before you invest, do these 5 things:
Create A Road Map of Your Personal Finance
People often tend to make investments before even evaluating where they financially stand. This is one of the reasons most people lose money. Before investing you should evaluate how much money is needed to run the house and fulfill the basic needs. At first, you need to list the income or the fund sources that can include rental incomes, dividends salary, profits, etc, and then make a list of rents, bills, installments you have to pay every month. The payments section should include every small amount which is fixed like the amount you spend on groceries, phone bills, internet, school fees, transportation, medical expenses, etc.
Evaluate the Risk You Are Willing to Take
Another important factor people tend to ignore is evaluating their risk capacity. Be it investing in mutual funds, bonds, gold, or stocks everything comes at its own risk. There is no doubt that both risk and return go hand in hand. But a person should know if they can handle in case of loss in investments.
Pay Off the Debts
One can make money from their investments only when they don’t have to pay any installments for clearing debts. For example, you invest and get a return of 10% from it but in the end, you are paying an extra amount for the loan you have taken. So, it is always better to invest only after clearing off the credit card bills or any outstanding loan or debt.
An Emergency Fund Is A Must
Life is uncertain and anyone can get into problems. Despite having efficient financial planning, one can be in unavoidable circumstances like health emergencies, loss in business, etc. It is always better to have come reserved cash or a certain amount in the savings accounts that can be used in such situations. Only after reserving an emergency fund, you should consider investing.
Have A Clear End Goal
An investment plan is considered to be good only when it has an efficient end goal. It is mandatory to consider the short-term goals and long-term goals before investing. The market stability is higher in the case of long-term goals. So it makes no sense no invest in a stock if you have a goal for the short term.
Factors To Be Considered Before Investing
Apart from the above 5 things, you must be thinking about what to look for when investing in a company and also what information should you search for before you invest. Here is a list of few things that should be considered and searched for before investing:
ROI-Return on Investment
ROI is the profit one makes on investment over the amount they spent. The return on investments can be in the form of capital appreciation, dividends, or interest. It should be considered as the net income after tax. The inflation rate should always be lower than the net after-tax return. ROI and risk are always directly proportionate.
Investment term or period is the investment’s time span. Investments can be long, medium, or short term. Long-term investments are made for more than a year and promise a higher return. And short-term investments are for less than a year and the return is less.
Risk in financial terms means the chances of losing the amount you invested due to unforeseen situations. Both the potential return and risk are also directly proportionate. For example: investing in stock is associated with higher risks but the chances of a higher return are great.
Every citizen of India has to pay a fee known as tax to the government based on the investment you are making. The implication of income tax should be considered by every investor to secure higher ROI.
Liquidity is something that can be easily converted to cash when needed. So you should invest in stocks or FD’s that allow you to liquidate when needed.
The fall and rise of market prices are known as volatility. A market is considered to be highly volatile when there are a lot of fluctuations in the price. So, the fluctuations of India and abroad both should be considered. The market volatility and investment risk are usually directly proportionate to each other.
The continuous rise in the price of goods that decreases the money value is known as inflation. The inflation rate and the consumer’s purchasing power are indirectly proportionate to each other. That means when the inflation rate increases purchasing power decreases. It is just shares and properties whose inflation rate is directly proportionate.
Every person has a certain amount that they can use towards financial investments which are known as a budget. So, you must create an investment budget only after securing funds for household expenses, debts, emergency expenses, etc.
Types of Financial Investment
These are the various types of investments available in which one can invest:
It is an open-ended investment fund that is managed professionally where money is pooled from various stockholders to purchase securities.
FD’s are investment products that are offered by NBFC or Banks. The interest rate that you will get is fixed in Fixed deposits.
A bond is nothing but a loan taken by firms. But the company gets money from the investors who buy their bond and not from the bank. The company pays interest to the investor in the form of an interest coupon on behalf of the capital they have invested in the bonds.
Stocks are also known as equity. On buying it means the person is buying a small proportion of the companies share.
The ownership of the asset of the company which has liability or debt attached is known as Equity. On deducting the liabilities from the value of the assets, you get equity.
Investment in real estate involves management, purchase, rental, ownership, or sale of a property for gaining profit.
Gold and Silver
One can invest in these precious metals simply by buying ETF’s which are also known as Exchange-Traded Funds.
The investment of the above is considered to be good when ROI, Investment Period, Inflation Rate, etc are considered keeping the household expenses, emergency funds, repayment of debts aside.