After March 2020, from the lockdown time when people were losing their secured jobs, a major shift in investment trends started in India post-pandemic 2020. Active investors accounts raised by a record 14.2 million in FY21 that is about three time more than the last year. In FY20, 4.9 million demat accounts were opened.
This lockdown was not the only reason behind the exponential growth in new accounts. Retail investing had been on the rise even before the pandemic hit the world. It just provided the trigger to young investors all over the world to the financial markets.
The government gave stimulus packages which put the money the market. Thus, people can get loans at a lower rate, have money to spend. Since they all were locked in their home, because of lockdown, they had no other way to enhance their financial security than try their hand at trading.
The easiest way to make money while you sleep is by investing. There is a famous saying of Multi-Billionaire Warren Buffett:
“If you do not find a way to make money while you sleep, you will work until you die.”
But after all this, If investments are not done in a planned way with a proper objective in mind, It can even put your financial future at risk.
So, We thought we should share some points that everyone should keep in mind before investing in any asset class.
Here are 3 Points you should consider before investing in any asset class.
1. Make A Personal Financial Roadmap And Decide Your Objective:
There are many certain expenses that come in everyone’s life. Also, there are many things that we want to buy or do in our lifetime, like buying house, car, gifting your parents, travelling the world, or anything like this. Some certain expenses like Kid’s education, their marriage, any unwanted hospitality bill or any emergency.
Now, You have to determine your investment goal, and exactly how much amount of money you’ll need to achieve your goal. Like you need 10 Lakh rupees for your kid’s marriage, or you need 50 lakh rupees to buy a house.
You should also look at your financial condition honestly and decide whether you’re capable of taking the risk. How much risk appetite you hold.
2. Time-Frame or Maturity Time:
When you decide your objective or goal, you need to know after how much time you need that money. Suppose your goal is your child’s marriage. Now you’ve to get an idea about by when you need to achieve your goal. Say your son/daughter is 5 years old, then you know that you’ll need that money after 15 years. Knowing the time-frame will help you to understand whether your strategy should be for long-term or short-term investment.
Short-term investments are usually highly risky and should be done only when you have a greater risk appetite. Stock Market or mutual funds they are highly risk asset class. Government bonds are posses very less risk.
Never invest in something which you feel is riskier than your risk tolerance level, you might stop investing in it midway.
3. Asset Allocation
An Asset Class is grouping of investments that exhibit similar characteristics. There are many options in market for investment. The most popular investments or we can say asset class are Stock Market Equities, Mutual Funds, Real Estate, Gold, Bonds, Hedge Funds, Commodities or even Cryptocurrencies. They all perform well at different times and hence, If you have different asset classes in your portfolio, you will ensure that investments are well amortized at all times.
For example, Equities have proven to produce the highest returns over extended periods of time. The CAGR for equities is highest among all other asset classes. But in the recent pandemic of covid-19, equities crashed the most. While Gold, which was delivering very low returns as compared to equity, continued delivering great returns even in the time of pandemic. Now as an investor, you should invest in different asset classes so that if one of them is not performing well during a phase, the other well performing asset class will cover the loss at that time.
How To Allocate Money For Investment: Asset Allocation By Age
This is a subjective question and differ from person to person.
- If you’re in your teenage or early 30s, and have a higher risk appetite, you can invest most of your investment in equities, some in mutual funds and debt (bonds).
- If you’re in your 30s-50s, you have to reduce your risk appetite and you will need some stable income. For that you have to reduce your asset allocation in equities and increase in mutual funds and bonds. You’ll also invest in real estate or gold as a better option because of their less volatility.
- If you’re more than 50, you’ll plan for your retirement fund, Kid’s Marriage or for their future. For this reason, you’ll less likely to invest in equities regardless of their best return. You can invest in Real Estate, Bonds, Gold or Mutual Funds.
Investing in Cryptocurrencies, Hedge Funds, or Commodities is their individual choice.
Bottom Line: Why And How To Invest?
Well, the answer is quite simple, to create wealth and achieve your financial goal. Investing is a great way to put your money to work and potentially create wealth. Smart investing can allow your money to best inflation and increase its value. Having the intent of investing is good thing, but it loses its purpose if the goal, the investment tenure, and the asset class for investments are not clear.
So before start investing, ask these questions to yourself.
- What is the objective of your investment?
- How long are you planning to invest or by when you need the required capital amount?
- What is your risk appetite?
If you have the clear answer of these questions and stick to it, these steps will help you achieve your investment goal seamlessly.
If you’re looking for passive income from investing, here is our artcile on 10 Ways To Generate Passive Income For Better Future.