7 main questions to ask yourself before investing

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Investing is right instrument and saving is key of investment but saving will not guide you some time. If you want to success saving need to be invested in right kind of instruments. For an effective investment strategy it is very important to ask yourself these below seven questions.

Find your objective

This is Basic question to ask before you begin to invest. Also, you can ask yourself why you are investing. Because, you must clear about your objectives in which you are investing. For wealth creation, income flow in retirement, to buy an asset etc.

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Once, decided, you can start implementing an idea how much money you need to fulfill it and what kind of challenges your current income poses in achieving this objective. Then you will identify it as short-term, long-term or mid-term investment goals. It will lead you to next questions as below.

You’re Investment Tenure

As per above, your investment have an objective you also have due date. This is also referred to investment horizon and this will decide tenure of investment. For example, your child’s marriage will be due in 15 years and your goal will lead you to invest according predetermined tenure to accomplish it successfully.

This tenure will calculate from time to time and investment will altered accordingly. That means you can avail any investment of tenure as per your objectives set. Check what is your capacity for monthly contribution?  So, you can take out some amount from your income towards investment.

This take you to next question whether you will go for monthly or lump sum payment towards investment. You must be careful while deciding on this amount and allow your money to flourish as per your objectives.

Thus, for your own funds you are the good judge for your investment horizon. Lump sums can useful for equity investors during market slumps and fixed monthly will provide advantage of rupee cost averaging.

Risk tolerance

Risks can be many kinds from markets, returns, inflation, interest rates, currency fluctuation and so on. There is risk-free investment and even reassuring investment carries risks. For example, equity mutual funds carry market risks which can erode your wealth in short term.

Endowment insurance plans carry returns risks where you may achieve returns less than inflation rate. Debt mutual funds react on basis of interest rate movements. You must examine investment risks before getting in.

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Tax efficient of investment

You must ask about tax efficiency of your investment and returns are taxed as per various norms of investments. So, you need check what your post-tax returns will be. For example, you will get 7% per annum on fixed deposit but if you are in 30% tax slab your post tax returns will be 4.9% which is poor.

You can consider instruments that have low tax incidence. For example, for long-term debt investing, Public Provident Fund is your best option for tax-free investments. Equity investment gains are tax exempt for long tenure. If you want to save tax under Section 80 C and earn market-linked returns. You can choose an Equity Linked Saving Schemes (ELSS) also provides tax-free returns.  Your investment tax-efficient is faster and you can achieve your objective.

Commission and charges that you need pay

There is sales agent trying to sell you an investment option and you have right to know what they will earn when you sign dotted line. You don’t rush to provide your signature and many forms of investment carry charges. You must ask what these charges are. You need to know what is your input will be used to pay these charges and commission. What your returns net of these cost will be.

How to exit this investment

Before you sigh ask how you can exit an investment. You need to exit an investment for many reasons. You need money in short-term or you are not happy with the instrument. Also, you may found better instrument but your money must be available to you when you need it. Investment has lock-in periods, exit loads, withdrawal limits etc. You have to understand how and when you can leave your investment.

Finally, you need not take verbal assurance of person selling you an investment option. Because, you are misled about returns, lock-ins, charges etc. by sales persons looking to make quick money. So, you have right to know these things in writing. If you know this entire question then you surely make best investment choice for yourself and you will reap good returns.

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