What to consider before you invest ?

Do you know what to consider before you invest your hard earned money ? Before we get there, my observation is that we Indians are generally superb savers and sloppy investors. Loosely translated, that means that each month we save money (good budgeting, eh ?) out of our monthly salaries that we bring home. But what do we do with the money? We sit on it ! We do not invest it intelligently.

Part of the problem lies in the fact that investors are not aware of what they should be doing with the money they have. And when they are approached by agents who are selling financial products that do not suit them, they fall for it! We buy products because someone out there is selling them. We are poor investors.

So let’s take this with a pinch of salt – not each and every investor has the capability to analyze each financial product or even the investment avenues at hand. This requires time and a skill that is developed over a period of time. Each one of us has a day job to go to so we cannot invest time to get to a level that will make us savvy investors. So what should we do?

The solution on what to consider before you invest

While investing your hard earned money, you need to think and think hard. There are three aspects which each and every investor needs to consider before committing his money to a financial product.

The first aspect which you need to keep in mind is safety. Safety of your money is of paramount importance. You cannot lose your capital.

The second aspect is the return that you would get on the investment – this is a very important factor for each one us – after all, why would you put money into an investment avenue where the returns are dead?

The third aspect would be how soon can you get the money when you need it – this in personal finance parlance is called liquidity.

Now the question is – which of these is most important and of more importance when compared to the others.
Give these three parameters to a layman investor and he will opt for higher returns at the cost of safety and liquidity. Returns are what plays on our minds all the time.

Every investor has a risk taking capacity but very few of them realize it. In fact, most of them don’t. That is because this is not something which one can infer or know easily, it really requires dedicated time with a knowledgeable person talking to you. So if investors do not realize their risk taking capacity, they might never be able to respect factors like safety and liquidity. They might completely ignore it. An investor who knows that he cannot take risk might settle for low returns in a safer instrument when compared to another who might settle for higher returns by parking his money in not so safe instruments without realizing what he is settling for.

History has shown how investors have suffered. The recent Saradha chit fund scam in West Bengal where thousands of investors lost money in the chit scam is a classic example of how investors put returns on more priority than safety and liquidity.
Come to think of it, there are many investors who would have parked their money in corporate fixed deposits (FDs) as well. Depending on the corporate, the liquidity aspect can come to hurt the investor.

So what is the ideal approach that will help you clarify what to consider before you invest?

The best foot forward

There is no question about the fact that safety, liquidity and returns all need to be looked into. Whatever you are saving for in your life, safety of capital is must; liquidity then can take the second place while the need to generate higher returns needs to be curbed.
In fact, think for a moment – if you follow goal based investing and do your financial planning, these three parameters are taken care of automatically.

So for example, if you are parking your money for retirement, first check on how much you need for retirement and then, given that this is a long term goal, park in equities as the returns historically have been the most from equity investment. So the need to generate more returns is met.

Returns get tied to the product you choose and the product gets tied to the goal you are saving for.

As far as liquidity and safety go, choose a product with formal advice from a financial planner and the chances that you lose your shirt are less.

The next time you decide to lock away your hard earned money, pause and think for a moment how the factors safety, liquidity and returns do in relation to the product you have chosen and you would then never be confused on what to consider before you invest all your life.