Investing made easier: Follow this 4-point checklist

Here is a checklist that will help you choose a suitable investment option.
4 mins
12 Oct 2022

Where should I invest? How much should I invest? How long should I stay invested? Is this investment option safe? These are just a few questions that riddle the minds of individuals looking to park their excess income and savings in a financial instrument hoping it would help them grow their wealth. Making investments may sound like a complicated task for many. But it does not have to be. Investing can be made easier by following a few basic guidelines, like this 4-point checklist.

1. Goal setting
This is the first and most important step of investing. You should invest according to your financial goals. This not only helps in avoiding financial mistakes that you might make while investing but it also gives confidence in the informed decisions you would make post assessing your goals and choice of investments. While setting any short-term, mid-term, and long-term financial goals these are a few factors you must consider:

  • Age
  • Income
  • Expenses
  • Liquidity requirements

After having gone through the factors mentioned above, you can start setting goals. Post that you should list them under three categories:

  • short-term goals
  • mid-term goals
  • long-term goals

Doing this will help you determine which tools to invest in and for how long you should stay invested. For example, if you wish to buy a property shortly you need to save up for the down payment of the apartment. This is a long-term goal that requires a very stable investment tool so that your capital remains intact. This is how you can streamline the options and circle in on a few.

2. Recognising risk appetite
The second most important step is recognising your risk appetite. This usually comes from the age factor as well. Young investors can ideally take more risks as they can eventually mitigate those over the course of the years. However, senior citizen investors inherently have a low-risk appetite as they have already made a lifetime’s worth of savings that they might not want to risk. In these two cases, you can choose tools as per risk tolerance. Investments are divided into three categories as per the risk involved.

  • High-risk investments

Tools that are based on market movements. When the market performance is great you can yield handsome returns, but when the market falls you face the risk of capital erosion. Suitable for young and high-risk appetite investors.

High-risk investment options:

  • Stocks
  • Crypto assets
  • Foreign exchange
  • Medium risk investments

These tools bear lesser dependency on market performance. This makes these tools more secure. You can choose these types of tools to balance your portfolio making sure that you earn well and also ensure the safety of funds.

Medium-risk investment options:

  • Mutual Funds
  • Real estate
  • Low-risk investments

These instruments bear no effect of the market movements and are best if you are looking to save for retirement, fund a significant monetary goal like buying a house, etc. The returns are assured in this case.

Low-risk investment options:

  • Senior citizens Savings Scheme
  • PPF
  • Fixed deposits

3. Asset allocation
Asset allocation can be done using this basic formula 100-X where X is the investors’ age. This will determine the percent you have to invest in equities and debt. For example, let us assume there are two investors aged 25 and 75 respectively. According to this concept, the young investor can allocate his assets in this way (100-25=75, that is, 75% of investments in equities and the rest 25% in debt). Similarly, for the senior citizen (100-75=25, that is, 25% of investments in equities and the rest 75% in debt as it is a more stable option).

4. Diversification of your portfolio
Financial experts usually advise not to put all eggs in one basket. By diversifying your investments, you can easily balance the risk involved. This will ensure that your losses in a high-risk investment will be compensated for by the profits you make in another safer investment tool. You can allocate a portion of your capital to fixed income instruments like the Public Provident Fund (PPF) or National Savings Certificates (NSC), Fixed Deposits (FD) for safety and equity-linked investments like mutual funds, and stocks for higher returns. Real estate and gold are also two investment options that people have been investing in for decades.

This is the 4-point investment checklist that can help you in choosing the best investment plan.