Choosing the right investment product among many options can often become a daunting task. However, you can simplify this task by considering some important factors before zeroing on to the right product.
In a fast-growing economy like India, the market is flooded with different investment opportunities. Unfortunately, while many of these investments can help you to meet your financial goals, some of them can prove to be a disappointment for your investment portfolio.
Therefore, it is important to determine your financial goals and objectives before embarking on your portfolio building journey. Once you are clear about the returns you want from your investments, you are all set to identify the right investment product.
Factors to Consider Before Choosing an Investment Product
Age is more than just a number when you are investing. Beginning investing at a young age has its advantages as you have lesser responsibilities and higher disposable income. As you grow old, you must shoulder many responsibilities like sustaining your family, planning your children’s education, healthcare, etc.
Therefore, your age should be the first factor while choosing your investment plan. While you can consider investing in high-risk plans that can provide you with high returns at a young age, you should gravitate to more secure investment options as you grow older
- Ability to Take Risk
Everyone has a different level of risk-taking capability. Some people can invest a large chunk of money in riskier instruments hoping for high returns and do not mind losing money in the process. On the contrary, the safety of capital is essential for risk-averse investors.
Now, you must plan your investments depending on risk-taking capability.
- Investment Tenure
Your investment decisions should be based on how much time you are willing to stay invested. You can significantly expand your investment options if you decide to stay invested for the long term.
Long term investments have two major advantages.
- Compounding Effect
When you stay invested for the long term, you keep accumulating interests or profits every year, which helps in wealth creation. Moreover, especially during the last phase of your long-term investment tenure, your investments can grow at a significant rate due to the effect of compounding.
- Lowering of Volatility
While market-linked products can witness short-term volatility, staying invested for long durations can significantly lower the volatility risks and provide more stable returns.
- Investment Goals
You must decide whether you want to invest for getting inflation-beating returns or you want to keep your money safe regardless of low returns.
You should invest in fixed deposits and debt instruments if you primarily want the safety of your capital. However, you will need to invest in relatively riskier market-linked products like equities or mutual funds to get high returns.
You can create the best investment plan by diversifying your portfolio with different investment products based on the factors discussed above. It’s all about aligning your investment portfolio with your long-term financial needs and aspirations and your risk tolerance level.