Every new investor desires quick returns in a short time period. This mindset leads individuals to make high-risk investments with big potential returns. They make money on occasion, but most of the time they feel as though their fingers have been burned. As a result, it’s always a good idea to start with the basics of investing.
In the journey of learning Investment basics, it is very important to know and understand your ‘ WHY’ before investing.
This one simple exercise will give you a very basic, broad perspective of your investment and will help you to understand how much – investment, time, and risk you can take for your investments.
Let’s understand it with the help of a story:
Angrez Singh, before coming to me, wanted to invest his money. He wanted to invest money so that money can be utilized in the future for his needs.
But he was not sure about when he would require money in the future? He also had no idea of the corpus needed at that time. Even not sure about how much should he invest and will it be sufficient to meet his needs in the future.
Like others, he had many questions and queries in his mind.
He wanted me to help him on this, because earlier also, he had started investments for the long term but had to withdraw those investments owing to pay his brother’s college fee. Afterward, he had some emergency hospitalization of a family member and he had to withdraw the leftover amount also.
But this time he was sure that he would not require money in the near future. Thus he is ready to invest for the long term and fully committed to staying invested.
Can you guess why this happened?
In my view, this has happened because Angrez Singh did not follow investment basics.
Just like Angrez Singh we also face such situations in our life and have to withdraw in between. Which again leads to losses due to unfavorable market conditions, exit loads, penalties, or taxation.
But Believe me, these situations can be avoided if we know our WHY of investing or Investment Basics.
Finding out your why before investing is as important as investing. Situations like Angrez Singh can be avoided if you know your WHY.
Let’s take the first step to know WHY of Investment
- Financial Life Goal – Setting a Financial Goal is very important. If you know your goal/destination then reaching the goal is easier. Therefore, if you know the goal you will come to know its duration and so is your investment duration. Thus investments should be linked with your life financial goals.
What can be your Goal – The most common life financial goals can be setting up a contingency fund, child education, marriage, Retirement/ Financial Freedom, Purchase of house, purchase of any asset, establishing some business at a later stage, car purchase, international vacation or any other goals.
One may have multiple goals which may be short-term, medium-term or long-term goals in nature.
- Investment Risk : Now as you know your goal, you will come to know your risk you can take for a particular goal and consequetly you can make a decision for a right asset allocation. For instance, you can choose equity mutual funds, PPF, long term bonds for long term investments. While short term funds like liquid, low duration funds, fixed deposits will be better for short term investments. You can also choose different post office saving schemes for your other medium duration ofr long duration investments.
- Type of Investment : After knowing investment duration and your risk taking appetite, you can very well choose investments.
Puzzled!
Don’t worry. It is not rocket science. Let me further simplify it for you.
1 Set your goals- short-term, medium-term, and long-term goals.
2. Decide the money required for each. You can take the help of a Financial calculator.
3. Choose investments as per their duration, risk, and requirements.
4. Get, set, and go.
Conclusion:
If you know the basics of investing your money investment becomes an easy and sure-shot accurate desicion for you. The side effect is confidence and joy of achieving your goals and ultimately tension-free life.
In Nutshell if you should know your why, you will come to know
- duration of investment
- Risk of investment
- You will not be tempted to withdraw and thus get better return, if invested for long term and had portfolio review done periodically.
