Seven preconditions to keep in Mind while Handling Investments

(1) Avoid Investing in Ponzi Schemes (or Schemes that Promise Quick Returns):

Never believe the promise of hefty returns in a short span of time. Nobody can ensure doubling of your money/ investments in legitimate ways in a short period. In today’s world, a scheme or investment vehicle with a moderate level of risk can offer an average 15-20% annual return (or maximum 25%) in a legalized way. Offering a growth beyond this level is highly risky, unstable and unsustainable. It may work well or run smoothly for a brief period but eventually the scheme will collapse, resulting in the complete wipe out of your capital.

(2) Don’t Mix up Investment and Life Insurance:

People used to buy life insurance policy as a combo of investment and insurance. They don’t realize both serve different purposes. While investment aims at growing your wealth, insurance aims at protecting your life. In doing so, you will end up in a peculiar situation – you will have inadequate insurance coverage and insufficient investment. We must buy insurance products purely on the basis of its coverage and investment products on the basis of its growth potential.

(3) Avoid Investment Concentration:

Don’t keep all your eggs in the same basket. Keep investing in a wide range of products or assets such as equity, fixed-income securities, gold and realty so that it will help avoid concentration risk. The strategy will ensure minimum growth even in adverse economic conditions. For example, don’t invest heavily in a particular sector – say, real estate or IT – which is booming at present. The trend may change tomorrow. Your portfolio should carry diverse assets so that it can grow even in the face of market volatility and economic downturn.

(4) Never Allow Emotions to Control Your Investment Decisions:

Use your brain, not your heart, to take investment decisions. Profitability and growth potential should be your investment criteria. That is, sometimes you have to liquidate your priced possessions, assets or property that have high emotional value. At that point, let business acumen and logic – not emotions – take a final call. Even in stock trading, emotions and trends prompt you to ‘time the market’ – it is the strategy of buying assets when the market is low and selling them when the market is high. It may not be successful all the time. The best principle is, do not respond to trends in knee jerk reaction, and stay invested calmly for an opportune moment.

(5) Never Turn to Social Media for Investment Tips:

Today social media is full of free investment tips and financial advices. However, most of them are doled out by ineligible or unqualified people. Much of these content is half baked and false, which will drive you to huge loss and liability. Always rely on reports and studies published by authentic sources and reputed institutions/ agencies for your investment guidance.

(6) Do Not Use Credit Card for Investment Purpose (Don’t Borrow from Unauthorized Apps):

Sometimes, people use credit cards/ unauthorized lending apps to draw money for investment purpose. But remember that credit cards (and other unregulated apps) often charge more than 20% annual interest on cash withdrawals and instant cash loans. If you default on your repayments, the financial charges/ fines may go beyond 30%. Normally, no financial product can offer an annual return exceeding this rate. So, borrowing at a high interest rate to invest in a low-growth instrument is definitely a bad idea. Further, a credit card payment default will also ruin your credit score and credit rating.

(7) Avoid investing in property at a young age:

Investing in homes/ property at an early age – or when someone starts earning – is a normal practice in India. As a result, almost 30-40% of their net monthly income goes towards servicing home loans. In other words, earnings from a period of almost 20 years –probably between 30 years of age and 50 years – will be fully utilized to pay home loan EMIs. Naturally, you will be forced to keep other investment plans on the back burner. It leaves no significant amount of money for investments such as mutual funds and retirement planning. The best-case scenario is that you save and invest maximum at the prime age and use a portion of it to buy a property/ home with a lower debt component. Remember, if your home loan is big, the interest component will eat a major part of your earnings.