Investments are necessary if you wish to create a corpus for meeting your financial liabilities and goals. Moreover, investments also help you achieve financial freedom by providing funds in emergencies. Thus, it is essential for every financially independent individual to invest. If you have an income, you should invest so that the income grows and gives you returns.
However, investments should be done after careful considerations. Haphazard or random investments don’t fulfil your goals. So, if you are planning to invest, you should always consider the following points –
- Which financial goal would be fulfilled by the investment?
When investing, you should be clear about the financial goal for which you are doing the investment. Know which goal requires fulfilling and then invest according to the identified goal. When you know your goals, you can earmark your investments. This helps avoid premature withdrawals and keeps you disciplined in investing. Moreover, when you know the investment goal, you can also work out the investment horizon and choose investment avenues accordingly.
- Does your financial portfolio have a healthy mix of investments?
It is often seen that investors have an investment preference and they invest only in one type of avenue. This is a mistake. Your investment portfolio should have a healthy mix of equity and debt instruments. An excess of either is bad. If you have too much equity exposure, you would suffer considerable loss in case of a market crash. As such, you need fixed income instruments like fixed deposit, PPF, etc. to stabilize your investments. Similarly, too much debt exposure is also bad as you lose out on the returns. So, diversify your investments and enjoy both equity and debt returns.
- Do your investments match your risk profile?
Every investor has a specific risk appetite. Your investments should, therefore, be in tune with your risk profile. If you like taking risks, you can invest primarily in equity while on the other hand if you are risk averse, debt instruments like fixed deposit schemes would be a better choice. So, you should understand your risk appetite and choose investments which suit your appetite.
- Have you chosen the right investment avenue?
There are multiple investment avenues and each avenue has different features and benefits. Every avenue differs with respect to the returns, investment period, inherent risk, tax implications, etc. and so, choosing the right investment avenue is essential. If you have long-term needs, you can invest in mutual funds, Tax saving FD, PPF, etc. However, if you have short-term needs, liquid mutual funds, bank savings account, etc. are feasible. Similarly, the avenues should be judged on other parameters too.
- Does the investment give you maximum tax advantage?
The last factor to consider is the tax implication of any investment that you are thinking of doing. There are many tax saving investment avenues and then there are others. Some avenues give you tax benefits on the invested amount, some give tax benefits on returns and some on both. Avenues which promise tax benefits on both investments and returns are the best as they would ensure maximum returns.
These are the important considerations for judging the investment avenues before you invest in them. Only when the avenue fits all parameters and suits your requirements, you should invest in it.