Useful Tips To Choose A Correct Investment Option
Updated On Mar 22, 2022
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An important part of deciding which investment to choose is to understand your comfort level with risk. Risk is the measure of volatility in an investment’s performance. When you make an investment, there is potential that you will have gains or losses due to the rise and fall of the financial markets. If you invest in stocks, they tend to have a higher risk profile. While bonds – also called fixed income – tend to have a lower risk profile. And, capital (or cash) preservation investments tend to have the lowest risk profile.
Tips To Choose Your Investment Option
1. Your goal affects the investment type
For example, if you want a safe, long term investment product that offers stable returns with little or no risk of loss of capital, then you can consider the Public Provident Fund (PPF). While the money is locked-in for a period of 15 years, you earn a steady compound interest on the amount invested.
On the other hand, imagine that you need to fund your child’s college fees in the next 12 years. Going by the current estimates, it could cost you anywhere between Rs 10-12 lakh. Since this is a long-term goal with high return expectations, it might be a good idea to invest in the stock market. You could earn good returns while the long time period helps you digest any possible volatility or risk during the investment period.
2. The Risk-Return playoff
These days, it is quite common for people to invest in the stock market through the mutual fund route. After all, investing in the stock market can be a time consuming affair. You need to be updated constantly about the market movements in addition to regular research. This might not be possible if you are working in a regular job already.
At such times, investing in mutual funds through a Systematic Investment Plan (SIP) can help you earn good returns at minimal risk.
3. Alternative investment options
And when the goal is to beat inflation, you can consider alternative options like gold. It can be an important part of a well-diversified portfolio as a hedge against inflation.
Historically, gold performs well when the price of living increases. The best part is that there are a lot of ways you can invest in gold. This includes physical gold (coins, bars) or gold Exchange Traded Funds (ETFs), gold deposit schemes or gold mutual funds.
You could also consider real estate. It is one of the fastest growing sectors in the country and there can be great opportunities in areas such as housing, hospitality and manufacturing.
4. Liquidity matters
A lot of investors in the country invest in real estate because of the high potential of returns in the future. However, one of the major drawbacks is that if you require funds urgently, this might not be the ideal option. Real estate is highly illiquid and it can take a long time for you to get the required funds.
Other investment options too have lock-in periods during which you cannot withdraw your funds. For example, bank deposits have a fixed lock-in. If you withdraw before this period, you earn lower returns and stand to pay a penalty fee.
The fundamental goal of investing is not to simply invest your money just for the sake of investing. It is to invest based on your requirements. This way, you can clearly choose the ideal investment avenue for your investment needs.
Also read- Best Investment Plans In India
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.