Novice investors often find themselves grappling with numerous inquiries, such as where to allocate their funds, the amount to invest, and the expected returns. It is essential to address as many uncertainties as possible prior to commencing your investment journey.
Here are several key recommendations to consider before making your initial investment.
Train Yourself First
It is strongly advised to educate yourself before initiating any investments. You should possess a thorough understanding of the financial products you intend to invest in, as well as the associated risks, potential returns, lock-in periods, and any applicable fees. Information can be obtained from various sources, including books, online articles, videos, or through consultations with certified financial advisors. For more intricate investment options, such as direct equities or commodities, you might also explore enrolling in online courses. Once you are confident in your knowledge of the investment products, you can proceed with your investments.
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Align your investments with financial objectives
It is essential that all your investments are aligned with your short, medium, and long-term financial objectives. While establishing these time-sensitive goals may pose challenges, particularly in your youth, it is worthwhile to make the effort. Common objectives might include accumulating a fund of Rs 1 lakh within a year for the purchase of a premium laptop, securing Rs 5 lakh over three years for a vehicle, or amassing Rs 20 lakh in five years to facilitate a down payment on your first home. Your financial objectives will offer vital guidance regarding the amount to invest, the duration of the investment, the types of investment products to consider, your risk tolerance, and your liquidity needs.
Understand your risk tolerance
It is common for novice investors to feel anxious when their investments experience initial losses. Therefore, it is crucial to comprehend your risk tolerance prior to commencing your investment journey. If you possess a low risk tolerance, it may be prudent to steer clear of high-risk investment options such as direct equities or small-cap equity funds, and instead, consider safer alternatives like recurring deposits and fixed-income investments.
Begin with caution
When embarking on your investment journey for the first time, it is wise to avoid hasty decisions. Investments should be closely tied to your financial objectives. Thus, it is recommended to start gradually and progressively increase your investment exposure, ensuring that your investments contribute effectively to achieving your goals within the desired time-frame.
Broaden Your Investment Portfolio
As a novice investor, you may encounter certain investment options that appear particularly appealing, while others may seem less engaging. Each investment vehicle serves a unique function and can contribute to the realization of your financial objectives. Therefore, it is prudent to refrain from allocating all your capital to a single investment that captivates your interest at first glance. Instead, aim to diversify your investments across a range of instruments that encompass various asset classes and risk profiles, each offering different potential returns. This strategy can help manage the overall risk of your investment portfolio and facilitate consistent, favorable returns, ultimately aiding you in achieving your financial goals in a timely manner.
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Avoid Investing Solely for Tax Benefits
While investing with the intention of tax savings is undoubtedly significant, it should not be the sole motivation behind your investment decisions. Your primary focus should be on investing to fulfill your financial objectives, while also taking advantage of available tax deduction benefits. Relying exclusively on tax-saving strategies may lead to suboptimal returns or involve lengthy lock-in periods, which could impede your progress toward achieving your financial goals within the desired time-frame.
Don’t borrow to invest
It is advisable not to borrow funds for investment purposes. Investing should ideally be done with the money you have earned and saved after fulfilling your financial responsibilities. Resorting to borrowing for investments can expose you to the risk of falling into a debt trap, particularly if your investments do not perform as expected. Starting with a modest amount when you first begin investing is perfectly acceptable, and you can gradually increase your investment as your income grows.
Start to invest early
Initiating your investment journey at an early age and committing to regular contributions is crucial. Many individuals postpone their investments, believing they will have more funds to invest later when their income increases. This approach is misguided. Starting to invest early, even with a small amount, can lead to significant growth over time, especially when compared to making a larger investment later in life. By beginning your investment journey sooner, you provide your capital with ample time to benefit from compounding, ultimately allowing you to accumulate a substantial corpus without the need for large investments in the future.
Regularly review your investment portfolio
It is essential to conduct regular reviews of your investment portfolio. Over time, you may discover that your investments do not align with your financial goals or fail to meet your return expectations. By routinely assessing your investments, you can identify any discrepancies and make necessary adjustments to ensure they are in line with your financial objectives. If you find it challenging to evaluate your investments independently, consider seeking assistance from a certified investment advisor.