Factors to consider before making an investment

Your investment portfolio should consist of products that match your needs and work towards achieving your goals. But how do you determine which products are suitable for you?

Below mentioned are a few factors that can help you find the right type of investment.

Risk tolerance

According to experts, there is a direct correlation between the risk associated with an investment and the returns it provides. Generally, higher the risk, higher is the potential return. However, different investors have different risk taking ability, according to their financial condition and preferences. It is essential to assess the level of risk you can take before selecting any instruments for investment. Once you know your risk taking ability, you can choose from a variety of options available for that risk type. For instance, high risk investments include equity investments, while moderate and low risk instruments include fixed income investment options like fixed deposits.

Age

One of the most important factors to consider while investing is your age. When it comes to investing, being young is an advantage. This is because you have more disposable income, not many responsibilities, a higher risk taking ability, and can wait for a longer period for an investment to bear fruits. As you grow older, you will have to take into account different factors like responsibilities, retirement planning, etc. In addition, you will have lesser time for your investments to provide returns. Hence, your ideal investment instruments change according to your age.

Investment objective

Before you put money in any instrument, it is essential to determine your investment objective. If your goal is simply keeping your money safe, you can choose investment options like fixed deposits or bonds that may provide moderate returns. However, if you are looking for higher profits and do not mind taking some risk, you can invest in shares or mutual funds.

Understanding of financial products

A variety of financial products provide many benefits today; however, they are complicated in nature. It is crucial to understand these products before adding them to your portfolio. Knowing the intricacies of the products will ensure that they not only meet your needs, but also provide higher profitability. For instance, if you are looking for only life cover, a term life insurance, which comes at a lower cost, is sufficient. However, if you are looking for returns with the coverage, you need money-back or endowment policies, which cost a little more.

Analysing these factors will help you determine which instruments are a good fit for your age, financial condition, risk profile and goals.