Five things to do before you start investing
From
times unknown, we have been taught the virtue of savings. “Saving for a rainy
day,” is the mantra that almost everyone knows. But then in a world, where we
are spoilt for choices, where a modest inflation of 5-6% is a norm, can saving
be enough?
While the
virtues of saving is indeed quite valid, one cannot but overstate the benefit
of investing. Investing into right assets and instruments can go a long way in
achieving financial independence. Thus, in a way, savings and investments go
hand-in-hand and are both necessary steps for creating a corpus.
But is
there a right time/age for starting investments?
The
honest answer is No, because, anytime and everytime is the right time to start.
So, whether you are a 20- something starting your career or a 40-year-old
realising you probably haven’t enough savings for retirement, investing your
income is a no-brainer.
However,
the sheer amount of options available in today's world can be overwhelming even
for the financially savvy.
Before
you take a dive and decide to invest in equities, bonds, mutual funds and the
like, there are certain prerequisites you need to take care of before you make
the plunge:
Set
your goals
It is often said that before the action comes the idea. Just like a rudderless and aimless journey will rarely lead you to your destination, similarly not having a financial goal will not lead you to financial independence. Setting targets and priorities is the very first step on that road. What is it that you realistically want to achieve? Retire at 35, an international vacation every year, a second home, and so on.
It is often said that before the action comes the idea. Just like a rudderless and aimless journey will rarely lead you to your destination, similarly not having a financial goal will not lead you to financial independence. Setting targets and priorities is the very first step on that road. What is it that you realistically want to achieve? Retire at 35, an international vacation every year, a second home, and so on.
Review
your finances
Sit down and take a good honest look at your finances if you haven’t done that before. Note down all the expenses in a month and if you can meet them. Do you have any credit card debt, student loans, vehicle or housing loans? Figure out how much remains at the end of it.
Sit down and take a good honest look at your finances if you haven’t done that before. Note down all the expenses in a month and if you can meet them. Do you have any credit card debt, student loans, vehicle or housing loans? Figure out how much remains at the end of it.
Create
an emergency fund
Life is bound to throw a few bouncers your way in the form of unexpected incidents which can cost you money. Set aside a small part of your income every month to deal with such expenses instead of prematurely withdrawing your investments.
Life is bound to throw a few bouncers your way in the form of unexpected incidents which can cost you money. Set aside a small part of your income every month to deal with such expenses instead of prematurely withdrawing your investments.
Chart
the risk appetite
This depends on a number of factors like age, income, expenses and liabilities. If you are in your 20’s or early 30s, you can look at some riskier investments like equity funds. The logic here is that even if it doesn't quite work out, you still have time on your side to make even. However, if you are on the other side of 30, you are bound to have expenses like education fees, medical expenses, saving up for retirement which would make you averse to risks. Usually, such people opt for safer investment opportunities.
This depends on a number of factors like age, income, expenses and liabilities. If you are in your 20’s or early 30s, you can look at some riskier investments like equity funds. The logic here is that even if it doesn't quite work out, you still have time on your side to make even. However, if you are on the other side of 30, you are bound to have expenses like education fees, medical expenses, saving up for retirement which would make you averse to risks. Usually, such people opt for safer investment opportunities.
Research
and reflect on the options
Frankly, there is no substitute for research. And with a myriad of investment options, don't be surprised to find yourself dazed and confused. However, if you have followed the previous steps, you would have narrowed down your investment type. If you do not have a significant amount of money to invest, you can look at mutual funds for smaller investment. Look at the various mutual fund schemes available in the market and if they have a Systematic Investment Plan (SIP).
Frankly, there is no substitute for research. And with a myriad of investment options, don't be surprised to find yourself dazed and confused. However, if you have followed the previous steps, you would have narrowed down your investment type. If you do not have a significant amount of money to invest, you can look at mutual funds for smaller investment. Look at the various mutual fund schemes available in the market and if they have a Systematic Investment Plan (SIP).
Though
past performance is not an indication of the future trajectory of a scheme, it
might offer a glimpse on how well it is managed. You will find the fund manager
mentioned in the scheme related documents. See how they have managed their
fund. Some funds are actively managed and some passively managed. Look at the diversity
of the fund. Mutual funds have a mix of equity and debt investments.
As the
adage goes about ‘Don’t put all your eggs in one basket’, diversify your
investments. Don't put it all in one particular sector or fund. This will
shield you from market volatility to a certain extent.
While we
will be talking about how to time the markets in the subsequent articles, it is
important to start now. After all, there is no good time to start a good thing.
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