Your Money: What you need to know before you start investing

December 15, 2020 1:30 AM

Tax saving is crucial, and it is an important parameter, but it is not the only parameter for considering any investment avenue or product. Investment gives financial freedom.

Therefore, it is important to be well-informed about the terms and conditions before making any investment.

By Lakhwinder Kaur Dhillon

disciplined iNTELLIGENT Investments help in creating wealth and meeting future financial requirements without falling into a debt trap. The investment process must start as soon as one starts earning. A large number of products and avenues such as stocks, unit-link insurance plans, bonds, fixed deposit, recurring deposit, public provident funds, mutual funds, National Pension System are available for investment. However, if we look at the investment dynamics in India, investment is directly linked with tax savings only and there is no set objective or goal defined for making investment and this is true for a very large section of people.

Look beyond tax savings
Tax saving is crucial, and it is an important parameter, but it is not the only parameter for considering any investment avenue or product. Investment gives financial freedom. The most important aspect to gain this financial freedom is to know where you are investing, why you are investing, how much you are investing and how it is going to secure your future financial requirements.

The future requirements may be related to buying a car, buying a house, planning for kids’ higher education, foreign vacation, retirement planning, meeting medical emergencies, etc. The goal of investment should be well-imprinted in the mind of the investor in terms of both short-term and long-term requirements. The goal may be different for different individuals depending upon safety of the investment, future growth, or regular income requirements.

Keep it simple
It is very crucial to keep one’s investment simple. The product or avenue where the investment is made should be easy to understand. Complicated products or avenues sometimes look very attractive but many a time you may end up losing your money. The investor should be well-informed about the nature of the investment, the benefits that are offered and how the investment is helpful in achieving the set financial goal.

The most crucial element to be considered before planning any investment is to understand the risk appetite, current net worth of an individual and the time frame within which the money is required. Exact future requirements for each goal must be ascertained and with consideration of inflation and the time frame. Traditional products like fixed deposits, recurring deposit, government bonds, etc., assure safety in investment with normal returns and offers tax benefits.

When these products are compared with the modern investment products in term of returns, many an investor is tempted to invest in the latter to earn higher returns but at times lose money due to lack of understanding and knowledge about these innovative modern products.

Advancement in technology has played a significant role in enhancing the knowledge of individuals in terms of products, avenues, and the expected returns from an investment. At the same time, agents and brokers sometimes misguide investors. Therefore, it is important to be well-informed about the terms and conditions before making any investment.

The regulatory bodies have taken several initiatives for educating and protecting investors but ultimately, it is the responsibility of an investor to read all the related documents carefully before making any investment. Never invest in any product or avenue where there is lack of clarity, especially when it comes to the stock market or derivative market.

The writer is assistant professor, Department of Accounts & Finance, Amity Business School, Amity University

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