5 Important questions to be asked before investing

There are two types of persons, first, who don’t have money and second, who have money. Now those who have money, want to make further money out of it, just like a person who has an egg and expects that one day the egg will hatch and very soon the hen will lay more eggs and then there will be more hens and more eggs and so on. Money can be made out of money, provided there is a proper investment plan and the same is implemented well. But, even before designing an investment strategy, one should look for answers to these five questions ;

Q 1. What are my Financial Goals?

Ans : Goal is something which we desire to achieve or complete, sometime in the future. A financial goal is a goal which has a monetary value. Every person has his set of financial goals which can be classified as ;

Short Term Goals : like going for a vacation

Medium Term Goals : like purchasing a house, buying a new car

Long Term Goals : like Child’s education, retirement planning

Every investment should be made with a financial goal in mind. These goals should be realistic. Before investing your hard earned money, you should have a very clear idea as to what are your financial goals and what shall be their monetary value in future considering the general inflationary trends. For example, if you are saving for your retirement, then you should have a long term investment strategy and opt for such schemes where the money is locked in compulsory for a substantially long period in order to build a sizeable corpus at the time of retirement. On the other hand if you are saving for a vacation then you should look for short term investments options without any lock in period . Financial Goals can be said to have been achieved if you have the right amount of money at the right time.

Q 2. What are my current resources?

Ans. Financial planning and investment decisions should be made after assessing the current disposable income. As a matter of fact, a person cannot save whatever he has earned, however he can spend his entire earnings very easily. If a person is earning Rs. 50,000 a month then neither he should plan his investments in such a way that he is compelled to save the entire amount of his earnings nor should he spend the entire amount of Rs. 50,000. A proper assessment of monthly expenses and other liabilities should be done and then the disposable income should be invested to achieve the financial goals.

Q 3. What is my future income potential?

Ans. An estimation of future cash flows also assists in taking wise investment decisions. If you are in an employment where your job is quite secured and you have fair chances of promotion in the years to come, then you should plan towards increasing your savings gradually and at the same time maintaining a decent standard of living. But in any case, uncertainties cannot be ruled out completely. Therefore a liquid fund of 2 to 4 months expenses should be made to provide for any contingencies arising due to loss of job.

 Q 4. What is my risk appetite?

Ans. Before investing, ask yourself

- How long can i wait for the returns to materialize?

- How much loss can i bear on my investments in case of a downfall?

Higher the risk tolerance level of an investor, greater is the potential for him to earn higher returns. But risk tolerance levels also keep fluctuating with the market conditions and then the classic mistake which the investor makes is that when the markets are bullish, he becomes blind to the risk and in bearish markets, he becomes blind to the opportunities. Risk appetite also keeps changing with age . A 60 year old person may not be willing to invest in equities which is considered to be a risky investment option. On the other hand a 30 year old investor may even route half of his investments towards equities due to higher risk tolerance levels.

Q 5. What is the tax situation?

Ans. Last but not the least, an investor must identify the impact of various tax laws which may have an effect on his investment income. For example, if you sell your equity shares within a period of 12 months at a profit then you will have to pay 15% of the profit as tax on short term capital gain, but if the same shares are sold after 12 months, then any profit earned on it is totally exempt from tax. Also investment in certain schemes of Mutual Funds may give you an added advantage of deduction under section 80C of the Income Tax Act. At the same time, you should also be aware of the tax slabs applicable on you, so that your investments can be properly planned and your post tax returns can be maximized.