Think Before You Invest

    The problem with the 21st century seems to be that of having too many options. Right from buying a mobile phone to buying a car to choosing an investment product, there are a number of options available today. What becomes crucial is how one decides which products to choose from, when to invest and for what time horizon? The fact is that there can never be one good product which suits everyone’s requirement. So it is indeed important to know what factors one needs to consider before making the right investment decision. 

 
What is the purpose of my investment?  

Dheeraj Gudal (name changed) had invested heavily in real estate. However, the investment did not have a purpose or goal attached to it. When his son decided to take up higher education, he had no money available to him in liquid form. Taking a loan was not possible for him. Moreover, the cost of education was around Rs 20 lakh and Gudal had to sell his property worth Rs 65 lakh for the same.
    What we tend to forget while investing is that every asset has its nature around which it behaves. Investing everything only in one asset class, especially one which lacks liquidity and divisibility, could turn out to be a very risky proposition in the long run.
 

Where do I stand today?  

During the process of financial planning, we often come across people telling us that they invested in a particular instrument, but are clueless as to what is happening with it. They are uncertain about their exact cash outflows and net worth as of today. It’s very crucial for one to first understand where one stands financially vis-a-vis his milestones and then start planning his future investments.
    Dhananjay Gupta (name changed) is a heavy credit card user and has an outstanding of Rs 1.25 lakh on his credit card. The irony is that he is looking at investing in a good investment product for the long term not realizing that his outflow is around 36% per annum by way of interest on his card which his investment product might not fetch. So, it is first crucial to settle his outstanding loan, get hold of his cash flows and only then start investing. 

 
Risk-return parity  

     It is very crucial to understand the returns our assets are generating against the risk involved. If there is a huge standard deviation in the portfolio and we are not ready for this kind of volatility, it would hamper our entire financial planning. So a risk-return parity depending upon the goals and financial situation should always be maintained.
    Investing is a good discipline and would certainly help in building one’s financial future. However investing without taking adequate precautions could land us up in further problem.