To achieve your long-term financial goals, it becomes necessary to park your funds in arenas that have the potential to grow. Long-term investments may cater to your goals at different life stages, such as when you purchase your dream home, set up a business venture, finance your child’s higher education, or achieve financial freedom in your golden years.
There is a dearth of investment options available in the market, like mutual funds, Unit Linked Investment Plans, pension schemes, and insurance policies, to name a few. You may evaluate various options based on your age, risk tolerance, and your financial goals. Doing so ensures that your financial portfolio has an ideal mix of best-suited investment vehicles.
Following are five aspects that you need to keep in mind before making an investment decision.
- Best use of your money
Making the best use of your money is the golden rule to remain financially stable. It becomes important to determine whether investment is the most appropriate use of your money. For instance, you may assume that you have money available for investment, when in reality you may have a huge outstanding credit card bill to pay. If the interest payable on your outstanding credit card amount is higher than the return received on your investment, you are bound to suffer a financial loss. In such a situation, it is wise to repay your debt on priority basis and consider investing later.
Another way of preventing financial damage is by purchasing an insurance policy before investing. An insurance policy offers the much-needed risk coverage in case of an unfortunate event. You, therefore, need not deplete your lifetime savings or wipe out all your existing investments. A recommended option is purchasing a mediclaim policy, one that offers protection from hospitalization expenses during medical contingencies. You may also consider investing in a term plan. This pure risk cover offers financial security to your loved ones in case of an unfortunate event of death.
For protection from emergencies, such as loss of job, you may consider building an emergency cushion fund of around three to six months of salary. This money may be invested in an instrument that offers immediate liquidity, such as a high-interest savings account, or money market funds. In case of an emergency, you may cash out the amount and finance your obligations easily.
- Reason for investing
To decide where to invest your money, it is important to identify the objective of investing. Some wish to preserve their capital and, therefore, take on low risks. Other investors seek to multiply their gains quickly and are willing to take on higher risks. Following are the investment strategies you may deploy for achieving your goals.
- Take aggressive risks for higher profits
If you are willing to take risks with your money with an objective to gain a higher return on investment, then growth should be your financial goal. To achieve this, you may invest in stocks and mutual funds on a long-term basis.
- Take a moderate risk for moderate appreciation
In case you do not need to fulfil any of your financial goals in near future, you may take on a little risk with your money. A wise choice would be to opt for investments that offer moderate appreciation with well-balanced risks, such as balanced funds.
- Be risk-averse if you need your money soon
In an event that your financial goal is in the near future, such as your retirement age, you may invest in less-risky instruments like bonds. Investments in these instruments ensure that the capital amount is safe and does not decrease in value.
- Your age
How old you are has a great impact on the choice of investments. If you have age on your side, you have a higher risk-taking ability as you may not have much responsibilities. Additionally, you have a longer time to recover from losses if the financial market fails to perform. Besides, starting early allows you to enjoy the power of compound interest. You may earn interest on your interest as well as the principal amount, allowing your money to grow significantly. As you grow older, your responsibilities increase and you may opt for investments that are not highly prone to risk.
- Ability to take on risk
It is common knowledge that higher the risk, the greater is the potential return. You may assess the level of risk that you are willing to take before making an investment decision. Once you have ascertained your risk-taking ability, you may make a choice from a wide variety of options. For example, if you are a risk-averse individual, you may opt for fixed deposits. Alternatively, equity investments would be an ideal choice if you wish to take on greater risks.
- Time horizon
You may choose the most appropriate investment product based on your available time horizon. If you have a financial goal with a greater time horizon, you may take on more risk and earn higher returns. In case you have short-term financial goals, the principal aim would be to invest in an avenue that does not put your money at risk and which can be converted to cash easily.
With various types of investment choices available today, choosing the best one may be an overwhelming task. You may take the aforementioned factors into consideration and make a well-informed investment decision.
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