Are you planning to start investing and seeking guidance for a successful investment?
If that’s what you want, this article is for you. The article provides a brief on things you should consider before investing.
Investing can be daunting without guidance and experience. There are multiple factors to consider, including understanding investment opportunity, the risk associated with investment and budgeting skills before you make a decision. Today’s decisions impact your financial future more, so getting them right is essential.
Investments include some risks with the potential of a greater benefit tomorrow. You might fret over minor mistakes in your strategy, fear losing your investment, market fluctuations, or even need clarification about all the options and what to know before investing. If that’s the case, don’t worry, you don’t have to face the challenges alone.
Essential things to know before investing
1. Know your financial position
Your financial position decides if you can afford the ups and downs of the market. It lets you determine the appropriate amount of risk based on your investment goals, situation, and risk tolerance and apprehend the overall impact of investment decisions on your wealth.
To begin, check your savings and budget to determine how much you can invest. Make sure that you know when you might need the invested amount.
2. Investment purpose
When investing, consider the factors which shape your portfolio:
• Financial goals
• Investment horizon
• Risk tolerance
Before investing, ensure you know why you’re getting into it. This shall help you pinpoint your investment goals and construct an ideal strategy.
Your financial goals are why you are investing, helping you determine how much you need and what types of investments best suit your needs.
Determine the range of time required to achieve the investment goal and identify your risk level to meet your investment horizon. Your investment horizon is the length of time you plan to hold your investments.
When considering risk tolerance, remember to check your risk profile before investing; it will help you understand market fluctuations. Understanding your risk tolerance is essential because it will influence your chosen investments.
3. Proper understanding and adequate knowledge
Proper understanding and knowledge before investing are crucial to making informed investment decisions and reducing the risk of financial losses. Start by learning the basics of investing, such as the different types of investments from various available resources, to get valuable information. Pay attention to economic indicators, market trends, and news events that can impact the markets.
4. Debt
How you deal with your debt levels will matter a great deal as you begin investing. High debt levels can cripple your ability to save for your future and make it challenging to fulfil your financial objectives. It’s vital to clear your debts before you start investing in managing your finances better and avoiding stress and anxiety.
5. Emergency fund
A solid financial plan begins with an emergency fund. It is a stash of money to cover unanticipated expenses, such as medical emergencies or job loss. Setting aside three to six months of your regular income as an emergency fund is always recommended if you face a major change in life.
Before starting to invest, it is crucial to prioritize building an emergency fund. Once you have a solid financial cushion to fall back on, you can begin investing confidently, knowing you have a safety net in case of unexpected expenses.
An emergency fund shall help minimize financial strain and prevent you from taking debt. The best way to have an emergency fund is to open a liquid fund to save a specific percentage of your income every month.
6. Asset Allocation
Asset allocation is the last thing you need to know about before investing. Asset allocation refers to the combination of different types of assets that you hold in your portfolio, such as equities, debt, and gold.
Different assets react differently to market circumstances and serve different investment objectives. For instance, gold prices tend to rise when the stock market is not performing well. So, when you have a mix of assets, the risk associated with your portfolio is lower than investing in a single asset class. This helps to optimise returns.
The right mix of assets will depend on your financial goals, risk appetite, age and obligations. So, it is essential to determine the asset allocation that will help you reach your financial goals.
If necessary, consider seeking expert guidance from a mutual fund distributor or a SEBI registered investment advisor to understand investments better.
