Investments are part of everyone’s financial plan. Remember when saving used to be the only option that we used to consider when choosing to do something in the future or as an emergency fund. But today, everything is an investment in some small part – don’t you think so? If you have a savings account, you will be getting some amount of interest over that savings account – and that is some form of investment. If you are buying a piece of land today in expectation of a hike in the near future, and in a matter of a year, that same piece of land shoots up by 20%, isn’t that an investment? Gold is an investment, silver is an investment, houses are an investment, bonds are investments, term deposits are investments, stocks are an investment, and this list can go on. But, with such a long list, how do you choose an investment for yourself?
Don’t worry – we have got your back.
Are you confused about choosing an investment? Here is how you can get this done in a simple way.
Three Main Factors to Consider When Choosing an Investment
Now, it might be confusing to make one choice when you have so many options to choose from, but the bottom line is – you will have to look into these three factors in order to choose the right investment for you.
1) What is your Risk Appetite?
Your risk appetite is the most important factor that you will have to consider. What is on your list? Do you have a low-risk appetite, a high-risk appetite, or are you somewhere in the middle? If you can afford to lose all of the money you are going to invest, that means you have a high-risk appetite; if you cannot afford to lose all of the money that you have, that means you have a low-risk appetite. If you can lose some of the money that you are going to invest, then you call yourself with a medium-risk appetite.
If you have a high-risk appetite, then you can invest in a company’s stocks. You can calculate business CAGR online, look at the history of the company and more and start investing in the company. Though you can afford to lose all of the money you have, you cannot be carefree about it; the aim would always be to make the most out of your investment.
If your appetite is low, then you can choose to invest in government bonds or post office schemes. These kinds of schemes will give you assured returns and guaranteed income. You would not have a fear of losing anything.
In the case of a medium risk appetite, you might want to choose investments such as gold and mutual funds. These kinds of investments will most often only give you income and very rarely losses, which is a good thing for your risk appetite.
2) What is your Time-Horizon?
The time horizon for your investment is a crucial factor. What is your time horizon?
- Is it a long-term investment?
- Is it a short-term investment?
- Is it a medium-term investment?
If you can be invested in the long term, then you can invest in stocks for years, or a fixed deposit as long as ten years – or even real estate that can give you returns down the lane.
But, if you have a short-term investment option, where you can only be invested for a short period of time, which is less than a year – you can choose liquid funds, short-term fixed deposits, or short-term recurring deposits. These funds will be over within your tenure, and you can reap the benefits of it.
If you are someone who can be invested for around three years, then you can choose mutual funds and bonds.
Now, you will have to combine your risk appetite and your time horizon to come up with the best solution.
3) The Sum of Investment
Though this is the final point of this post, it is still one of the most important aspects that you would have to consider. You can not buy a stock if your budget is only ten thousand rupees, but the stock is twice the price of that.
You cannot invest in a gold bond that costs 5,000 rupees when you have only 2,000 rupees with you.
At the same time, you cannot be someone who is investing in 1,000 rupees recurring deposits when you can fund a 10 lakh fixed deposit.
All of these three factors make up the baseline of your investment. It is only when you consider these three aspects you can consider any other factor at all. These three criteria are your job to fulfill. This is so you can end up with the investment option that suits you the most and can also serve all of your financial needs in the long run.
There are also some things you should not do
- Never have unrealistic wishes.
- You need to only invest what you own (do not invest with debts)
- Make sure you know your potential, along with your limits
- Make sure you can invest safely with enough expertise in the tool
You cannot always look externally to make a decision, the first step to an investment decision will always come from within, and you will have to make sure you have looked within before you look at the external factors that consider an investment.