1. Want to start investing: 8 questions you need to answer first

Want to start investing: 8 questions you need to answer first

Making up your mind about how, when, and where to invest is quite tricky.

By: | Published: September 27, 2017 2:33 AM
how to start investing, tips for investments, PPF, BankBazaar.com, liquidity, interest rate changes, credit ratings To get you started on the path of prosperity, here are some essential questions to ask yourself. (Reuters)

Making up your mind about how, when, and where to invest is quite tricky. Often, it requires understanding your own mind—what are your life plans, how much risk can you take, how much money can you set aside, and so on. To get you started on the path of prosperity, here are some essential questions to ask yourself.

What’s your objective

Before you begin any kind of investing, you must know your objective. Are you looking to save taxes? Are you looking to create wealth? Are you saving up for the fulfillment of a dream, such as buying property? Once you have a clear target in mind, you can start planning towards it, and asking other important questions.

What’s your horizon?

How far in time is your target? A target must have a tenure in which to achieve it. In investment parlance, this is known as the “horizon”. For example, you intend to put your child through college in 15 years. Therefore, you have 15 years to create a college fund that would be adequate in its time.

How much can I set aside?

The money for investment must come out of your ordinary income. How much money can you set aside every month, quarter, or year so that your normal expenditure and liquidity are not impacted? Since you can best judge your own resources and understand your objectives, you must make a realistic calculation of the amount you won’t miss if it’s locked up in an investment.

What are my risks?

Most forms of investment carry risks—even the ones that have been traditionally considered safe. The risks pertain not just to returns but also to inflation, market fluctuations, interest rate changes, credit ratings, exchange rate upheavals, and so on. Before you enter an investment, make sure you understand all associated risks, and not be swayed by the advertised rate of return.

What’s the tax efficiency?

Your earnings from most forms of investments are taxed. For example, a fixed deposit promises you 7% returns, but you’re in the 30% tax bracket, so your post-tax returns are an unappetising 4.9%. But on the other hand, you could also invest in PPF (which is completely tax-exempt) or equity (where there’s no long term capital gains tax after one year). The more tax-efficient your investment, the quicker you’ll achieve your objective.

What are my charges?

Before you sign the dotted line, check your investment charges and the commission you’re going to pay to the agent selling you the product. These charges can reduce your final earnings. Therefore you should know what you’re getting into.

What are my options?

In the connected age, you shouldn’t settle on the first product being sold to you. As a discerning investor, you must compare your options before finalising the one best suited to you.

How do I liquidate my investment?

Lastly, your money should be available to you when you need it. You need to ascertain the terms and conditions for liquidation. Many investments have exit loads, lock-in periods, penalties for premature withdrawal, and even limits on how much you can withdraw. You should understand these limitations and avoid rude surprises when you’re in dire need of liquidity.

The writer is CEO, BankBazaar.com

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