Factors to consider before making an investment decisions

Investment Decisions

Investment Decisions – Investing the money for future growth is generally a passive type of business where your physical presence is not necessarily required. Here the distinctive feature that separated it from other types of money involved is that in most of the businesses, you have to work for money, but by doing investment money works for you. There mainly three factors. Which decides the growth of your investment and its safety.

  1. Security: – This can also be called a safety rating. It shows how secure is your money during the whole investment tenure. The higher safety rating of your money, safer is your investment in terms of repayment of interest or dividend besides the principal amount. For example investment in a saving Bank’s account in a Bank enjoys higher safety rating as compared to investment in the money market or investing in mutual funds is safer than investing in the equity market. Such safety rating is done by authorized govt. approved agencies like “CRISIL” and “Standard and poor” who conduct periodic audits of various financial institutions where common public put their fund in different schemes. Such a list of ratings is regularly updated and published for the benefits and awareness of the common public.
  2. Liquidity: – This parameter shows how quickly you can get your money back to the financial system. For example, the money in savings Bank a/c is more liquid than a fixed deposit for 3 years, as the saving bank deposits are payable on demand whereas fixed deposits can only be encased before the expiry of the term by paying a certain penalty. Higher the liquidity of an investment, more easily it can be called out from the system.
  1. Rate of Return: – It shows at which rate your money is growing with, for examples of Savings Bank deposit is less than than the fixed deposit scheme. It means that investment in fixed deposit grows at a much faster rate than the savings bank deposit.

The movement of all the above three factors in the money market is patterned in such a manner that if you focus on the increase of any one of the above parameter the other parameter would tend to decrease.

For example, in case you want to increase the rate of return of your deposit by keeping it in fixed deposit, you have to compromise on its liquidity and lock it the same for a greater period. In another case, you can compromise on security rating by putting the investment in money market and get a higher rate of return as compared to Bank’s deposit.

In order to achieve your long term financial goals, it is essential to make an ideal balance of all the three factors as mentioned before. These financial goals should match your long term or short term objectives. Long term financial instruments may cater to your goals at different life stages, like a dream house, setting up a business, financing your children education or achieve financial freedom after retirement.

There are plenty of investment options available in the market like a mutual fund, SIP, ULIP, pension plan, and insurance schemes, etc. You must evaluate these options based on your age, risk tolerance, and personal financial goals. Therefore before taking the investment decision, you should ensure that your financial portfolio has an ideal mix of all the three major factors through such financial instruments.

Following are the five important aspects, you must consider which making an investment decision.

  1. Making the best use of money: – It is the golden rule to remain financially stable. For example, you may have some money available for investment, when in reality you may have a large outstanding of cash money like a credit card. If the interest on outstanding money is higher than the return of investment, it is wise to repay the credit card debt on priority and considering investment later on. Another way to prevent financial loss is to buy an insurance policy before investing. An insurance policy offers the much-needed risk coverage in case of unfortunate event. Therefore, you need not sacrifice your savings or wipe out the existing investment. Medi claim policy is one such option that covers hospitalization expenses during medical contingencies. You can also purchase in an insurance term plan, which financially secures your family member in case of your untimely demise.

For protection from other emergencies like job loss, you may choose to build an emergency cushion fund of around three to six months of salary. This money may be invested in an instrument that offers immediate liquidity, such as high-interest savings account or money market fund.

  1. Investment by objectives: – Those who wish to preserve capital may take low risk, while others who seek to multiply their gains quickly are willing to take higher risks. Following may be the suitable strategies.
  • Take an aggressive risk for higher profits
    For this, you may have to invest in stocks and mutual funds on a long term basis.
  • Take a moderate risk for moderate appreciation
    In this case, the wise choice would be to opt for investment that offers moderate appreciation with will balanced risks, like balanced funds.
  • Be risk-averse if you need money soon

In an event that your financial goals are in the near future like retirement, you may invest in less risky instruments like bonds. It ensures that your amount is safe and does not decrease in value.

  1. Age: – When you are young, you may have a higher risk-bearing capacity, as you may not have many responsibilities. Besides you have a longer time to recover the losses if the financial market fails to perform. By starting investment in the early stages, you also enjoy the compounding of interest, which provides significant growth to your money. As you grow older, you may opt for investments that are not highly prone to risk.
  2. Risk appetite: – It is commonly known that the higher the risk, the greater is the potential return. You should assess the level of risk before making an investment decision. For example, if you are a risk-averse individual, opt for fixed deposits. Alternatively, equity options may be the ideal choice for investment.
  3. Time Scale: – You should choose the most appropriate investment product based on the available time horizon. You can opt for high risk and high return mode in case of a long time horizon. In case you have short term financial goals, the primary aim should be to invest in avenues that do not put your money at risk and can be converted to cash easily that means with higher liquidity.

Therefore with the various investment choices available, you can take aforesaid factors and key variables into consideration and make a well-informed investment decision.

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