The investment landscape has more options today than ever before. New products and dynamic market conditions have added to the complexity of investing your money in the right options. Should you invest in shares or mutual funds? Is it better to keep your funds in fixed deposits? How good are ULIPs? Does ELSS help you achieve your financial goals? What about Cryptocurrencies? Or, peer to peer lending which assures investors of returns up to 30%? In this article, we will share ten golden rules for becoming a successful investor.
Rule #1 – Determine your Financial Goals
When it comes to investing, having many alternatives can often be confusing. Choosing the right option requires you to be clear about your financial goals. Ask yourself a simple question:
What do you want to achieve by investing?
Good returns, of course. But what do you want to do with the returns? Here are some examples of financial goals:
Such goals help you determine the amount of risk you would be taking on your invested funds. Also, it gives you a better perspective of the investment horizon.
Rule #2 – Invest only when you understand the investment option well
Once you are clear about your financial goals, risk preference, and investment horizon, it is time to select the investment vehicles. As we mentioned at the beginning of the article, there are many options available for investment today. While each investor has a preference for certain avenues of investment, before selecting something new, ensure that you understand it well. Here is a small coffee-shop chat that might sound familiar:
Friend1: I just received my bonus and I’m thinking of investing it. But, I don’t know where.
Friend2: Brother, invest in ULIPs. They seem to be the in-thing nowadays. Everyone is talking about them!
Friend1: Even I have heard about them. I think I will invest in ULIPs.
Friend1 buys ULIPs. However, he doesn’t earn as much as he could if he understood ULIPs and rebalanced his portfolio regularly.
Rule #3 – Diversify
Most investors would have heard this term regularly in the investment circles – Diversification. It simply means not keeping all your eggs in the same basket. Or, not investing all your funds in one investment option. For example, if you have invested all your savings in stocks and for some unforeseeable reason if the market crashes overnight, then you might stand the chance of possible losses. On the other hand, if you spread your investments across different asset classes and across different options within each asset class, then you hedge yourself against over-exposure to poor-performing assets.
Rule #4 – Don’t invest only to save tax
Most employed professionals are guilty of investing merely to save tax deduction from their salaries by investing in insurance premiums, five-year tax saving term deposits, etc. A little bit planning and creating an investment plan can help you invest in avenues that are best suited to your future requirements. By investing with the sole purpose of saving tax, investors often tend to ignore the benefits offered by other avenues which may nullify or even exceed the amount paid as tax.
Rule #5 – Keep an eye on the fees
You will many investment options offering promising returns ‘subject to fees’. We are not saying that these fees will be necessarily huge, but it is prudent to know them well. The reason is simple, your returns will be post-deduction of fees, right? Ensure that you know about all the costs involved right from investing up to redeeming your investments.
Rule #6 – Benefit from the compounding of interest
While everyone can benefit from compounding, the young investors have an added advantage here. Compounding is when your interest earns further interest by remaining invested. The longer you stay invested, the higher your probable returns can grow. Reinvest your dividends/ returns to ensure that your money works optimally to help you achieve your financial goals.
Rule #7 – Never borrow to invest
No matter how promising the returns look, borrowing and investing should be a strict no-no. Borrowed money usually attracts interest, unless you have borrowed it from friends and/ or family. In either case, the pressure of making more than you have invested can play heavily on your mind and cloud your investment decisions. A good financial decision is one that is made with a calm and composed mind, not when you are desperate to earn x% returns.
Rule #8 – Monitor your investments
Once you have invested, ensure that you regularly check on the performance of your investments. This is necessary regardless of whether the investment is performing above or below expectations. While it is necessary to exit below-par performing assets to limit your losses, it is also important to exit above-par performing ones to book the profits. This is possible only when you monitor your investments regularly.
Rule #9 – Seek Financial Advice
Financial advisors are professionals who understand the market well and are aware of the pros and cons of most investment avenues. Seeking advice from such professionals ensures that you are better informed before making decisions about investing in a certain avenue.
Rule #10 – Consider new-age investment avenues
When Mutual Funds were introduced in India in 1964, most people were skeptical about investing in them. Around a decade back, peer to peer lending was introduced to the Indian market. In Peer to Peer lending, Fintechs or financial services offered as an end-to-end process via the internet, offer a platform where you can lend funds to Retail Borrowers without the intervention of a bank. In simple words, you can offer a personal loan to a borrower by assessing their risk class. People-Lend, a P2P Lending platform offers possible returns of up to 30%. So, you decide the risk, you control the exposure and diversify according to your investment goals and time horizon.