Savings are fundamental to any sort of investments, but only savings would not lead to expected growth in wealth.
Every investor wishes to know the best available financial instrument for investing since they put in their hard earned money with an intention of multiplying and ensuring financial stability and support during difficult times. Savings are fundamental to any sort of investments, but only saving would not lead to wealth growth. In order for your money to grow, your hard earned money needs to be invested in the right instrument.
1. What is my Objective or goal?
You should be clear as to why you are investing. Is it for a short term goal for example to buy an asset or for steady income during retirement or for long term wealth creation? Once this is clear, you would have a sense of your investment tenure and how much money you need to fulfill that objective. This will help you decide whether it is a short-term, mid-term or a long-term goal. It will lead you to further questions as below.
2. What is my monthly investing capacity?
You should know what amount you can separate from your income for investments on a monthly basis. You are the best judge of this amount, your objective and your investment horizon. This would lead to a close thought on opting for lump-sum payment or monthly contribution towards investment. While lump-sums can be useful for equity investors during market slumps, a fixed monthly contribution can provide the advantage of rupee cost averaging.
3. What is my investment tenure?
Like objective, an investment should also have a due date known as 'investment horizon'. This would assist you in deciding the investment tenure. For example, you wish to buy your own house in 5 years from now or wish to build a retirement corpus of a certain amount. Your goal would lead you to invest accordingly in the stated time frame. This tenure should be evaluated from time to time and necessary changes made in investments.
4. What are the risks attached?
Risk taking capacity varies from person to person and hence you should be aware about risks attached before investing in any financial instrument. Risks are of many kinds namely emanating from the markets, mis-selling, inflation, interest rates, currency fluctuation and so on. Risk free investments are rare and even the most reassuring investments carry risk. For example, equity mutual funds carry market risks which may erode your wealth in the short term. Endowment insurance plans carry returns risks where you may achieve returns less than the prevailing inflation rate. Debt mutual funds react to interest rate movements. Therefore, you must examine the investment risks thoroughly before getting in.
5. Is this investment tax efficient?
Returns from most investments are taxed as per norms. You should be aware of the tax implication of your investments as it will help you to know the post tax returns. For example, a fixed deposit offers you 7% per annum, but if you’re in the 30% tax slab, your post-tax returns would be 4.9%, which will lead to very poor post tax return. You should look for instruments that have lower tax incidence. For example, for long-term debt investing, Public Provident Fund is your best option since the investment is completely tax-free.Capital Gains from equity investments whose tenure is longer than one year are tax exempt. If you want to save tax under Section 80 C and earn market-linked returns, you can choose an Equity Linked Saving Schemes (ELSS), which also provides tax-free returns.
6. What commission & charges are payable?
Many a times, relationship managers and sales agents try to hard-sell you an investment option. You as the investor have a right to know what they will earn when you sign up for that investment. Do not rush into providing your signatures on several forms. You should ask what the several form charges are for. You should know what part of your contribution will be used to pay these charges and commission, and what your absolute returns will be.
7. When and how can I exit this investment?
You may need to exit an investment for multiple reasons. You could be in short-term requirement of liquidity or you are not satisfied with the returns and have found a better instrument. The point is, your money should be available to you when you need it. Often, investments have lock-in periods, exit loads, withdrawal limits etc. You should have complete understanding of how and when you can leave your investment, and avoid bad surprises at the time of need. The same should be taken in written format from your advisor to avoid any mishaps at the time of exit.
With these questions answered, you’ll surely make the right investment choices and reap satisfying returns.