Investment objectives
Identifying clear investment objectives is one of the first things an investor should know before starting investments. Setting clear, definite, and time-bound goals helps offer purpose to your investment journey. Sticking to your goals ensures investment discipline and prevents impulsive responses based on short-term volatility. Additionally, your investment objectives guide your strategy and asset allocation decisions since different assets are suited to different goals. For a short-term goal like a down payment on a house, you might want to stick to less volatile assets like debt funds to minimise chances of capital loss. Alternatively, for a long-term goal like retirement planning, you might prefer assets with a higher risk-reward balance like equities. You can afford to take greater risks since retirement is a long time away, giving you enough time to ride out short-term market ups and downs.
Risk appetite
Another thing you must know before you start investing is your risk tolerance capacity. Investing your hard-earned money in various instruments poses certain investment risks. Your risk tolerance determines how much risk you’re willing to accept for returns on your investment. For instance, you may be a high-risk investor if you’re capable and willing to take on higher risks for greater returns. You may want to invest in assets like equities that best align with such a risk-return profile. Conversely, you may be a low-risk investor if you’re after stable returns and capital protection against a low risk exposure.
Knowing your degree of comfort with risk helps you select the right assets for investment and make consequent buy and sell decisions. It is also important to note that your risk appetite is subject to change during your investment duration due to factors like age, changes in investment style, life stage events, etc.
Diversification
The principle of diversification is one of the most vital things you must know before you start investing. Diversification refers to the process of spreading investment across asset classes, sectors, and geographies to minimise your investment risk. Placing all your hard-earned funds into one asset class or sector can be detrimental if that asset/sector underperforms or undergoes a slump period. Diversifying your investment helps tackle market volatility and protect the overall returns of your portfolio. As an investor, you diversify your investments mindfully. An optimally diversified portfolio is one that includes assets with low or negative correlation so that losses in one asset can be offset by gains from another.
Fees and expenses
Understanding the fees and expenses associated with the investment is crucial because they can significantly influence your total gains. For instance, market-linked investments like direct equities and mutual funds involve various fees and charges like brokerage fees, management fees, transaction fees, and expense ratios. These costs can eat away at the returns from your investment and therefore must be diligently factored in before investing. Picking investments with low costs can help you save a substantial sum over time. Thus, as an investor, you should know the cost of investing before you start investing.
Investment horizon
Lastly, your investment horizon is another crucial thing you must know before you start investing. Your investment horizon is the timeframe for which you wish to remain invested. Understanding your investment horizon helps you pick the right assets and choose conducive investment strategies. Acknowledging your timeframe of investment also helps you avoid unnecessary risks and make informed decisions. For instance, if you are investing in a retirement goal that is 20 years away, you can adopt an aggressive approach and invest in equities. After 15 years, when your retirement goal is just 5 years away, you can switch to safer alternatives like debt funds to ensure capital preservation. Remember that short-term goals have a shorter timeframe and tend to benefit from a conservative approach, while long-term ones have a longer time frame and, therefore, can benefit from an aggressive approach.