Manu Nedunkandathil, CFP
Five factors to consider while choosing an investment
Updated: Aug 20, 2021
Stakes are always high when it comes to your own money. Blindly choosing an investment product is like walking into a casino and placing a bet. You win some, you lose some. But you can never be certain of victory. The only thing certain is that the house always wins.
Understanding an investment product is as important as knowing the right route to take before starting a journey. The right choice will not only make the journey pleasant but also shorten the time required to complete the journey.
To cut the chase, let me list out the five most important factors, which are like thumb rules for any investment. They are as follows: -
Safety is the cornerstone of any investment. No investment can be defined as an investment if the invested capital is lost. This is what the investment guru Mr. Warren Buffett has to say on the rules of investing.
"Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1"
Liquidity means one should be able to access his investment without any loss of value and time. What is the use of an investment, if one cannot access it in the hour of need? Liquidity along with safety is the basic foundation for any investment.
Transparency in any activity reduces the chances of fraud. Transparency in investments ensures timely and accurate dissemination of information to the investor as to where his money is getting invested, what is the cost involved and how is the investment performing. All this helps in making an informed decision by the investor, thereby ensuring the safety of his investments.
We are all duty-bound as citizens to share a portion of our wealth as taxes for the benefit and wellbeing of the nation. However, as chief steward of family resources, one also has a duty towards his family to be as tax efficient as possible. Tax is a hidden and unavoidable cost of investment. Hence, the lesser the tax higher will be the return on investment.
An average person spends only 30 to 35 years from his entire life span actively working and earning. In this limited time, one not only has to provide for the present but also invest to create wealth for the future. Hence, the most important question to ask when investing in the long term is " whether this investment will translate to wealth or no?". When you are parting with money today, you are not only sacrificing the use of it today but also incur an opportunity cost. Investments can only be turned into wealth if it grows at a rate beating inflation and taxation. The real returns in your hands must be positive. Hence, when you are looking at investing for creating wealth in the long term, the rate of growth of the investment is an important factor to consider.
I hope the above guidelines will help you in selecting the right investment product based on your needs.
"Risk comes not from the known, but from the unknown."