The prime budgeting goal for any middle group family is to save additional money at the end of the month. People tend to accumulate their saved money and accumulate the extra money they spend on something that has high depreciation value such as a gadget or new furniture. The best option however to save money is to invest it in a mutual fund or in a savings account. The savings account, however, will earn nothing other than interest but will help in keeping the money safe for the future and for short term saving purposes.
In order to accumulate and save money for long term goals, it is important to keep the money in a place where the money gains its capability to earn more. This money will be of much help in the future in getting the child into college, to set up a business, to plan for retirement, etc.
What should be the scope of investment?
Investment is indeed getting the money to grow at a rate that is faster than saving it in the savings account. It is the way of saving money for something better ahead in the future. Though there is a little risk for the money, this investment will potentially grow and yield a much higher return. Also, money that saves this way will grow and retain its value even during adverse economic conditions such as inflation and decreased GDP. Thus, the investment seems to the best solution and the investment portfolio should consist of products that match the investment goals. The following are the important factors to consider before finding out the right type of investment.
1. Risk tolerance:
Experts reveal that there is a direct correlation between the risk that is associated with an investment with the returns it offers. Generally speaking, higher the risk higher is its return potential. Different investors have different risk-taking abilities. This also depends on their preferences and their financial conditions. But it is mandatory to assess the level of risk that one can take before selecting the instruments for investment. After learning one’s risk-taking ability, it is possible to choose a variety of options that are available for the risk type. Investment options that incur high risk are equity investments whereas moderate and low-risk instruments include fixed income investment types such as fixed deposits.
2. Age of the investor:
Age is one of the most important factors to review before making an investment decision. Being young is an advantage when it comes to investing. This is because, one will have more disposable income, will not be bound by responsibility and will also have a high risk-taking ability. Most of all young age people are able to wait for a longer period for an investment to bear fruits. As people get older, they will have to take into account a number of different factors such as family responsibilities and retirement planning. Also, they will have less time for investments to provide returns. Thus the ideal investment instruments will change according to the person’s age.
3. The objective of the Investment:
Before you put money into any instrument it is important to determine the investment objective. For those who want to keep the money safe, it is wise to choose investment options such as bonds or fixed deposits that will render moderate returns. However, if you are looking for higher profits and do not mind taking the risk, then the best option is to invest in shares or in mutual funds.
4. Understanding the different types of financial products:
There are a number of financial products that are available for investment with a number of known benefits. However, they are also complicated in nature based on their reviews. Thus it is absolutely important and mandatory to learn about each of these financial products before adding them into one’s investment portfolio. Learning the intricacies of the products in deep will help in meeting one’s investment needs and in profits. For example, those who are looking for only a life cover, term insurance that is coming at a lower cost is sufficient. However, those who are looking for returns with the coverage it is important to look for money back and endowment policies that can cost a little higher. Analyzing all these factors will help in determining which instruments if they are a good fit for one’s age, risk profile, financial condition, and goals.
5. Consider the best mix of financial instruments for investments:
A potent investor will consider before financial instruments for investment depending on their investment returns, and their fluctuation in different market conditions. There are three major types of asset categories namely bonds, stocks, and cash. The market conditions can cause one asset category to do well and another asset category to render average or poor returns. By investing in one or more asset categories, it is possible to reduce the risk of losing money and the overall investment return will result in a smooth ride.
Investment is important as it helps in meeting one’s financial goals. It is important to exert enough risk in one’s investment portfolio to earn huge returns to meet one’s goal. But it is always important to invest with caution.