5 Things To Know Before You Invest

Updated on: Jan 11th, 2022


5 min read

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You may consider investing as allocating resources with an expectation of earning a profit in the future. It is the process of purchasing assets that grow in value over time and offer return through capital gain or regular income.

You must invest if you have a clear objective in mind. Otherwise, you will never attain your financial goals. Let’s have a look at the five things to know before you start investing. 

1. Set financial goals

You must clearly define a financial goal in terms of value and a time frame to achieve it. For example, you have a financial goal of buying a car worth Rs 8 lakh in three years. You can set short, medium and long-term financial goals and choose appropriate investments to achieve these goals. 

You can choose the financial products depending on your time horizon and risk tolerance. For instance, an aggressive investor with an investment horizon of over five years can invest in stocks or equity funds to attain long-term financial goals, such as buying a house. 

You must invest in debt funds and fixed income securities to achieve short and medium-term financial goals depending on your risk profile. For example, you can invest in fixed income instruments to attain short-term financial goals, such as a foreign trip after one year. 

2. Make a household budget

You can calculate investible surplus only after accounting for the entire household income and expenditure. You may create a household budget where you write down all income sources such as salary, rental income and interest on FD. It would help if you also wrote down all expenses such as grocery bill, loan EMIs and fuel expenses. 

You can follow the 50-20-30 thumb rule where 50% of your income goes towards living expenses, 30% towards spendings on outings and travel and the remaining 20% on saving for financial goals. It would help if you could adjust the percentages according to your age and circumstances. 

3. Create an emergency fund

You must create an emergency fund before investing for long-term financial goals. It helps you during a financial crisis such as a medical emergency or a job loss. You must have at least six months of living expenses in your emergency fund. 

You must have access to your emergency fund at any time. It would help if you kept half your emergency corpus in liquid funds. It is one of the safest debt funds and invests in debt securities and money market instruments with a maturity period of 91 days. You may invest the remaining corpus in an SB account or a sweep-in fixed deposit account. 

4. Get debt-free

It would help if you got rid of loans at the earliest before you start investing your money. You will find personal loans and credit cards, charging high interest rates. It helps if you pay off high-interest loans before investing if you want to create wealth in the long -term.

You could distinguish between a good and a bad loan. For example, a home loan helps you own a house (asset) and offers tax benefits. You could avail of an education loan if you want to enjoy a bright future. However, a personal loan availed to go on a holiday or buy an electronic gadget may be a bad loan. 

5. Avail adequate insurance

You must avail of a life and health insurance plan before you invest your money. It would help if you availed yourself of family floater health insurance that protects your family against emergency hospitalisation due to illness or an accident.

Otherwise, you will have to dip into your emergency fund or liquidate investments. It could put your long-term financial goals in jeopardy. It would help if you availed of a term life insurance plan to cover the risk arising out of untimely death. It is a life insurance plan that offers high mortality cover at a low premium. 

You could opt for a sum assured of 15-20 times your annual income in the term life insurance plan. It would help if you availed additional life cover for significant liabilities such as a home loan. 

You must select a suitable asset allocation based on your investment horizon and risk tolerance. You can choose the right investment avenues to achieve short, medium and long-term financial goals.

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