Finance

Things to Consider Before Investing in An Asset

Investment literally means the process of acquiring an asset. The aim of such a process is to generate income through the asset bought that can become a regular source of income. When an investment is purchased with the aim of investment, the investor does not consume it. Instead, it is used to generate wealth. The main purpose of investing is to acquire an asset right now and sell it at a higher price at a future date.

Read more: Eligibility for Education Loan

One thing to note is that not all investments will suit every investor. Each of them with its own pros, cons, and risks, suit differently to different people. Before choosing anyone or multiple forms of investments, investors need to understand their goals, set an investment horizon, contemplate on their understanding of risk, understand the taxation of each of the investment products. One should never stick to only one investment option and should invest in multiple investment vehicles. Having a diversified portfolio will help you spread your investment risk across multiple asset classes. Moreover, having an investment portfolio with more than one type of investment will help boost returns. It is, therefore, essential to have a balanced asset allocation for earning optimal returns. Asset allocation varies with age, investment goals, and risk tolerance of the investor.

Things To Keep in Mind While Investing

Investing isn’t only about taking your money and putting it in some asset for it to lay there. You need to shortlist the assets that work for you while keeping in mind the risks and returns of your assets in order to optimize your investment. And therefore, we bring to you some of the factors you should consider before you invest your money. Investment Objective:

Every asset has its own unique investment objective. Therefore, it is important to see whether the requirement of investing in a particular asset meets the return it offers. Carefully aligning the financial plan and investment objective with the financial goal is important. For example, for long term goals such as a child’s education, marriage, and retirement planning, one can invest in equities. On the other hand, for short term goals, one can consider FDs, money market instruments, etc.

Investment Horizon

It constitutes the period in which the asset offers returns. Different types of investment options are suitable for different investment horizons. For example, a PPF account has a lock-in period of 15 years, and mutual funds equity, though they don’t have a lock-in period, it is advised to stay invested for at least 3-5 years.

Risk

Risk is the measure of volatility, or in other words, the price fluctuations of an asset in response to the change in market dynamics.

Returns

One important thing to remember is no investment offers the same returns. Few investments offer high, whereas few offer comparatively low returns with risks associated with them. In order to understand the return of a specific asset, it is necessary to study and understand the asset’s historical returns and performance. However, it is also important to note that historical patterns do not predict future returns, rather give you an idea of how things work.

Costs and Expense:

Every investment comes with its own set of costs and expenses. For example, investing in shares attracts transaction costs. Mutual funds charge fund management costs, exit loads, etc., a penalty in some investments in case of premature withdrawal.

Liquidity

Liquidity is important to address any unforeseen events. For example, mutual funds investments and stock market investments are highly liquid, which means the investor can easily sell their holdings and convert them to cash, as compared to real estate investments which are not highly liquid.

Taxation

Returns from investments such as in the case of mutual fund investments are also subject to tax on the basis of their holding period and type of fund.

In order for optimum investment and returns, one should have sufficient knowledge about the asset and we, therefore, advise everyone to do their own research carefully.

Also Read: What are Mutual Funds and 10 Vocabulary Terms

Related Articles

Back to top button