Many of us wish to increase our wealth exponentially and secure our financial position. We seek investments which has no risk and makes a lot of money for us. The challenge however, is to find such an investment avenue.
There are many investment options available for first time as well as regular investors. It is hard to say that one is better than the other investment as a lot depends on the investor’s profile and risk appetite.
When people look for investment avenues, majority of them are unclear about their overall financial objectives. They only aspire to make money and have no clue about why they are investing, what is the target returns to benchmark against, what is the time horizon required for their investments to provide desired returns, etc.
If you are a first time investor, or for that matter an existing investor who wish to make fresh investments, keep following things in mind to identify the best investments that suits your needs.
Knowing your investment objectives
One thing that we at Personal Money recommend to all, is to set your financial objectives and write it down somewhere you can easily refer to when needed. If you are wondering, “How on earth can I set my financial objectives?”, you can refer our earlier post How to create a Financial Plan?
These objectives can be categorized under different basket based on your personal needs and requirements. Such as :
- Short term (3 months to 12 months) – to meet such objectives, investment avenues that carry minimum or no risk are suitable.
- Medium Term (1 year to 5 years) – investment avenues that offers better returns and may carry slightly more risk can be considered, and lastly
- Long Term (5 years and above) – As the time horizon is adequate, you can look at investment that offers best returns and are considered more risky.
Believe me, this will help you a lot in identifying appropriate investment and saving avenues to meet all your financial objectives. For instance, you can not rely on Unit Linked Insurance Plans to meet your short term and medium term plans or for that matter relying too much on equities for your short term plan would be too risky.
It will be of great help to allocate your assets appropriately and objectively rather than following a thumb rule based asset allocation recommended by some wealth managers and financial advisors.
The Age Factor in Investment
Another important factor to identify the best investment that will make you the most money with the least risk, is your age. Yes, your age plays a very important role in deciding your investment and financial strategy. Just like financial objectives are unique, age at the time of making an investment is also different from person to person.
If you are in your 20s, you have the chance to take on a lot of risk and make a lot of money. If you’re in your 40s or 50s, you are probably close to retirement, your investment choices and preferences would be different as you would not like to expose yourself to risk of losing your hard earned money.
People who are investing for the first-time would most likely be beginners. Such people may not know much about investing. To become more comfortable and assured about their investments, they should start with products that they are aware of and feel most confident with.
First, a look at your age and decide what a good investment for you would be from risk point of view. If you are a beginner in the age group of 40s/50s, you would want to do something that is more secured and carries least risk such as bonds, small savings, bank fixed deposits or conservative mutual funds to meet all your financial objectives.
If you are in your 20s/30s, you can afford to take more risk and may look towards stocks, aggressive mutual funds, etc to meet your medium and long term investment objectives and Bonds, Bank Fixed Deposits, etc to meet short and medium term objectives.
The Risk Tolerance of Investor
There is nothing called a 100% safe investment, every investment has risks associated with it. The degree of risk that these investment products carry may vary from product to product.
While investing you may often have to do a risk-return tradeoff, the principle that potential return rises with an increase in risk. Of course, you will probably make more money by taking more risk in your investment portfolio, but you need to make sure you are able and willing to take that risk.
With so many different types of investments to choose from, you need to understand your understanding your risk tolerance to determine how much risk you can handle. Based on your personal risk filter you can then pick the investments that offer you best returns.
It is said that Knowledge has power. Even in investment, all you have to do is learn all you can about the investment that you chose and follow a disciplined approach towards investing regularly to meet all your financial objectives. The more you learn about various investment options, you stand a good chance to make the right decision and generate more returns, no matter how much risk you take on. Happy Investing!