Factors To Consider Before Investing
Section 22 Module 6
There are several factors you have to consider before investing any of your hard-earned money.
These 10 factors are:
- Emergency Fund - Do you have an emergency fund equal to 3-6 months (ideally 6 months) income put aside in a savings account for emergencies?
- Regular Vs One-time Investments - Consider whether you want to invest on a regular or one-time basis. Investment options vary significantly based on your preferred mode of investing.
- Your Budget - How much money do you have to invest, over and above your emergency fund? Starting is easy, continuing is difficult.
Always choose an amount that would be consistently affordable over the investment period.
- Investment Horizon - Consider when do you need your money back. For example, if you are saving and investing for your child’s education, you need the money when they are 18.
If you have 10 years left before they turn 18, you have to select an investment, that returns your money in 10 years.
- Capital Growth or Income - Consider whether you are aiming for capital growth or a steady income from your investment.
For example, you may need income during your retirement years, and capital growth when you are younger, or for milestone goals such as ‘Saving for your child’s college fees’, or ‘Buying a Home’, etc…
- Investment Portfolio - Consider what other investments you have done as well, because no investment is done in isolation.
If you want to achieve protect your money through proper diversification, you need to consider how this investments fits within your existing investment portfolio.
- Investment Type - Consider what type of investment you are looking for. Sometimes you may want an investment that is capital and/or returns guaranteed, for example with milestone goals such as ‘Saving for child’s college fees’, or for ‘Buying a home’. Other times, you may want a market-linked investment that gives you maximum returns on your investment.
- Your Risk Appetite - Some people are natural risk takers regardless of their age or investment experience. Others cannot tolerate too much investment risk or possibilities of losing money.
The investment you select has to match your attitude towards risk.
- Understanding of Investment - You should understand the way an investment works, at least the concept of the investment, not necessarily the minute details.
If you don’t understand it at all, you may want to select something that you understand.
The main factors of an investment that you should understand are:
- The structure,
- The charges, and
- How the investment returns are derived.
- Financial Advisor - Are you using a financial advisor to begin with?
- Importance of Financial Advice - Most of the time, a properly qualified and experienced financial advisor can clarify your understanding of the investment you are aiming to go for, and help you reduce the risk involved in investing.
- Salesperson or Independent Financial Advisor - It is always in your best interest to select a financial advisor that represents you, not the investment provider or bank.
This is because financial advisors who represent only one or two providers have to push their product to you, even if it may not suit your goal.
An independent financial adviser who represents you will look out for your best interests so you can refer him/her more clients.