Investments may either be need based or without any aim. An aimless investment may fail your objectives as you don’t know how much to invest, where to invest and for how long to invest. Without the answers, you would chase high returns and would end up losing money by investing in high markets, by seeing existing investors getting exorbitant returns.
Moreover, without any investment horizon, and with the only motive of getting high return, you would redeem your investment at a loss, when the return will turn negative in a low market.
So, to get a meaningful return, you need to do proper financial planning to know why to invest, how much money to invest and when you will need the money back – that is for how long you need to stay invested – whatever be the condition of the markets in between.
Planned investments to fulfill your financial needs would let you know how much to invest in which instrument to reach your financial goals by taking minimum risks as per your risk-taking capacity.
So, before making investments, you need to determine –
Why to invest
For this, you need to determine all your life goals and calculate how much money will be needed to reach the goals after how long.
How much to invest
Once you know how much money you will need after a certain duration, you may determine how much to invest to get the money by taking minimum risk. If you have a large amount of money, you may not take much risks to reach the goal, but if you have limited resources, you may have to take a risky route to get a higher return to reach the goal.
Where to invest
As per the return you need to get to reach a financial goal, you may determine the financial instrument in which you need to invest. Among the instruments giving similar returns, you need to select the safest one to ensure safety of the capital invested.
How to do need based investment?
For need-based investments, you need to follow these steps –
- First identify your financial need
- Then determine for how much duration you need to invest
- Then ask yourself much risk you can tolerate
- Then determine, how much to investment and how much return needed for each need
- Lastly, select which of the available funds – equity, debt or balanced – will suit your need
So, investments should be need based, else if you invest just to get high return, you will never be satisfied with your return, as you will chase the return and in case of a market downturn, you will become worried and will withdraw money at a loss.