One of the major reasons why anyone invests is so that they don’t have to make compromises in their lives. This is more so the case when we consider the things that truly matter to us like our family and our time.
When we choose to invest though, we often have to make compromises. Our savings are usually not enough for all our goals. However, no matter which goal we are investing for, here are three things you shouldn’t compromise on:
1. Knowing why you are making that investment in the first place
There is a difference between saving and investing. One of the key differences that gets left out is that you can save without having any specific goal apart from just wanting to save. Investing, though, needs a reason as that will decide how long you can invest for and what you should invest in.
If you compromise on knowing why you are investing you might end up choosing the wrong investment instrument. This brings us to the next point.
If you compromise on knowing why you are investing you might end up choosing the wrong investment instrument.
2. Knowing what you will be investing in and the potential risks involved
If you don’t know or understand what you are investing in, it is a red flag. Many people who end up losing their capital or are disappointed with the returns they get while investing have a poor idea of what they are investing in.
Invest some of your time researching and understanding the basic nature of what you are investing in. If for example it is equity, then know the nature and return profile of equity. You should know that there will be varying degrees of volatility (market ups and downs) involved.
Don’t make the mistake of investing in something you are absolutely clueless about. The smartest investors acknowledge openly if they don’t know or understand something. This will help you choose the right instrument for your goals.
Most of your investment goals can be met with relatively easy to understand instruments. You don’t need to be a financial genius. Take the help of trusted and qualified advisors if you must but do understand what you invest in.
3. Knowing how much time it will take to get to your investment goal
Reaching any investment goal will take time and not knowing how much can throw a big wrench in your financial plans.
Our financial plans for big goals such as a child’s college education or our own retirement to a peaceful and beautiful place require a significant chunk of our savings. These as mentioned above, need to be invested in the right instruments for the right duration.
A multi-crore retirement fund will take decades of saving and investing, unless you earn a lot more than the average. A travel fund will take much lesser. While this may seem logical, many of us plan for goals without considering how much time our investments will take.
If you plan your retirement fund based only on fixed income instruments, like an FD, you are going to take a lot of time as well as money. This is because at the rate of return these will offer, you will struggle to keep pace with inflation.
Knowing that you need many years means choosing an instrument that is appropriate for such a timeline. Equity is ideal for a retirement fund, but for a travel fund? Not so much.
Something that’s just a couple of years away is better invested in fixed income instruments like debt funds or even a fixed deposit. You don’t want or need the volatility of equity in this case.
To sum up
Getting the above-mentioned things right is the first step to ensuring that your investments are effective and do the work for you rather than leaving you wondering if you did the right thing. Just as in life, knowing when to compromise and when not to can make all the difference.