7 absolutely important questions to ask before investing
Saving is a key to any kind of investment, but merely saving would not guide you through uncertain time.
Investing in the right instrument is what an investor vies for. After all, it is his hard earned money that he wants to multiply along with ensuring a financial stability for his golden years and difficult times. Saving is a key to any kind of investment, but merely saving would not guide you through uncertain time. To be a successful investor, the saving needs to be invested in the right kind of instruments.
For an effective investment strategy, it is very important to ask yourself these seven crucial questions.
What is my objective?
This is the most basic question to ask before you begin any kind of investing. Like any other work, you should ask yourself why you are investing. You should be clear about your objective. Is your investment for creation of wealth, for income flow in retirement, for helping you buy an asset, or something else? Once decided, you will start developing an idea of how far out in time this objective is, how much money you need to fulfill it, and what kind of challenges your current income poses in achieving this objective. Once you see the contours of the objective, you will identify it as a short-term, mid-term or long-term investment goals. It will lead you to further questions as below.
What is my investment tenure?Just as your investments should have an objective, they will also have a due date. This is also referred to as the “investment horizon”. This would decide the tenure of the investment. For example, your child’s marriage will be due in approximately 15 years. Your goal would lead you to invest accordingly for a predetermined tenure to accomplish it successfully. This tenure should be evaluated from time to time and the investment should be altered accordingly. This would mean that the tenure of any investment should be such that you can avail them as per your objectives set.
What is my capacity for monthly contribution?
You should ask yourself about the amount that can be separated from your income towards investment. This would take you to next question of whether you will go for a lump sum payment or monthly contribution towards the investment. You should be careful and realistic while deciding on this amount and allow your money to flourish gradually. You are the best judge of your own resources as well as your investment horizon. While lump sums can useful for equity investors during market slumps, a fixed monthly contribution can provide the advantage of rupee cost averaging.
What are the risks?You must ask yourself if you prefer risks or are averse to them as an investor. Risks could be of many kinds, emanating from markets, inflation, returns, mis-selling, interest rates, currency fluctuation, and so on. There’s rarely such a thing as a risk-free investment, and even the most reassuring investment carries risks. For example, equity mutual funds carry market risks which can 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. You must examine the investment risks thoroughly before getting in.
Here’s Why You Should Invest In Equity Mutual Funds
Is this investment tax efficient?
You should ask about the tax efficiency of your investment. Returns from most investments are taxed as per various norms, and you should question what your post-tax returns will be. 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 is poor. You should consider 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. 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. The more tax-efficient your investment is, the faster you can achieve your objective.
What commission & charges am I paying?
There’s always a relationship manager or sales agent trying to hard-sell you an investment option. You as the investor have a right to know what they will earn when you sign the dotted line. Never be rushed into providing your signature. Several forms of investment carry charges. You should ask what these charges are going to be. You should know what part of your contribution will be used to pay these charges and commission, and what your absolute returns net of these costs will be.
How can I exit this investment?
Before you sign the dotted line, ask how you can exit an investment. You may need to exit an investment for many reasons. You may be in short-term need of money; you are not happy with the instrument; you have found a better instrument, and so on. 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 an absolute understanding of how and when you can leave your investment, and avoid rude surprises at the time of need.
Lastly, it’s not enough to take the verbal assurance of the person selling you an investment option. Often, investors are misled about returns, charges, lock-ins etc. by sales persons looking to make a quick buck. It’s your right to know these things in writing. Armed with these questions, you’ll surely make the best investment choice for yourself and reap satisfying returns.(The writer is CEO of Bankbazaar.com)