Investment is a journey, not a destination. It is a process of making a series of financial decisions targeted towards earning returns and realizing your financial goals without taking too many risks. Disciplined Investing has the potential to turn insignificant amounts of invested money into big corpus . Hence, it is important to keep certain aspects in mind before you start investing to make sure that you make the right decisions. Today, we will share five crucial aspects that any investor must know before investing.
Where do You Stand Financially?
Before you start investing, it is important to have a clear picture of your finances. You will be investing money with an aim to generate returns. And so, it is important to know exactly how much you can invest and where you can cut corners (if any).
The process is similar to creating a budget. You list down all sources of income including your salary, incentives, bonuses, interest from fixed deposits, and any other ways in which you might expect to receive money during the year. Segregate these amounts based on the frequency at which you receive them – weekly, monthly, annually, etc.
Next, sit with your bank statements for the last six months and start listing your expenses. Look for fixed outgoings like rent, utility bill payments, groceries, loan installments, and any other fixed monthly expenses.
Also, create a list of half-yearly or yearly expenses like a vacation, gym membership, etc. By the end of this activity, you should have a clear picture of your expected annual expenses, their frequency, and importance.
Once this is done, divide the expenses into essential and non-essential categories. While essential expenses will be the ones that you can’t live without, the non-essential expenses will provide you a glimpse into the costs that you can cut to boost savings and investments.
This can give you a stable platform to start your investing journey.
What do You Want to Achieve by Investing?
A clear definition of an investment plan is another essential aspect of successful investing. There are three pillars for creating an efficient investment plan:
- Financial goals
- Investment horizon
- Risk tolerance
Let’s say that you want to buy a house within the next 5-10 years and are investing to accumulate a corpus to help you get there. This would require certain potential returns and hence, a certain amount of risk. If you are not comfortable with the risk, then you might have to increase the investment amount and reduce the risk. Combined with a clear understanding of your finances (point#1), create an investment plan that is designed to help you achieve your goals with ease.
Different Investment Avenues
There are various options available to investors today. From stocks to mutual funds, real estate to gold, and commodities to cryptocurrencies, there are numerous avenues available. While you might not invest in all of them, it is important to understand these avenues before you commence your investment journey. We know many investors who stick to one or two investment avenues like stocks and mutual funds and try to create an investment portfolio using them to achieve their financial goals. While it is not impossible, opening yourself up to most of these options gives you more control over your portfolio and increases your chances of reaching your financial goals.
Also, each asset class has options available within that can help you create a diversified portfolio with ease. For example, if you look at Mutual Fund schemes, then there are various options such as Equity Schemes/ Debt Schemes/ Gold Savings Funds etc… Also, if you think about real estate, then you can invest in property (if you have the required funds), Real Estate Investment Trusts (REITs), etc. Hence, ensure that you spend some time understanding various avenues before investing.
Importance of An Emergency Fund
Many new investors do the mistake of treating their investments as their emergency fund. This can be a bad ploy since emergencies usually arrive unannounced and if you dip into your investments, then your achieving your financial objectives can get difficult. Hence, another important thing that you must think about is creating an emergency fund.
Life is unpredictable. Hence, situations like a sudden job loss or accident or unexpected bills can put a strain on your finances. If you don’t have an emergency fund, then you will be left with no choice than to break your investments or get a loan. Under either circumstance, it can put an undue strain on your finances.
To determine the size of the emergency fund, it is important to assess your minimum monthly expenses and be prepared for at least 6-12 months of costs if your income stops. While there is no rule around this, most people find it comforting to have an emergency fund of the size of a six-month essential monthly expense.
If you merely look at the rate of interest on a fixed deposit offered by a bank and a personal loan, you will find a huge difference between the two. For example, if the bank offers a rate of interest of 7% on a term deposit, it will charge 15-16% on the personal loan. In other words, debt will take more from you than what your investment will offer. Add to it inflation and you have an insurmountable mountain as your adversary. Hence, it is important to ensure that you plan to clear off as many debts as you can. High-interest debts like credit cards and personal loans should be settled on priority. While clearing home loans is usually not possible, try to ensure that you are otherwise debt-free.
Like most other things in life, preparing yourself for the investment journey is essential to succeeding as an investor. The points mentioned above are a must to help you prepare for your investment journey. Remember, this is a long process and a weak foundation will not get you far.
Disclaimer: This blog has been contributed by the content desk of Quantum Mutual Fund AMC. The views expressed here are of the author and do not reflect those of Groww.