THE BASIC KNOW-HOW OF CHOOSING AN INVESTMENT

When you think of investments, the first thing that comes to your mind would be stocks, bonds, deposits, etc. You also think that we invest to ‘become rich in a quicker way’. The reality is that an investment requires deep planning and controlling, and requires lots of common sense and self discipline. There will always be a learning curve, some ups and downs, but the end will always be rewarding.

There is no doubt that an income can be earned by working. But you can also earn money by investing your money in a safe place that appreciates overtime.

But the rule for investing is not the same for all investors. It depends on the risk tolerance of each individual/investor.

Risk Tolerance

The optimal path for investment is selected based on the risk tolerance. And risk tolerance in turn is based on three main factors:

Investment objectives: There could be many objectives based on which an investor invests money. Few of the objectives are safety of the investment, income, appreciation of the current investment/capital. This, in turn depends upon the age and his/her own personal circumstances.

Timeframe: If a person is looking at a long term investment, then he has more time to take risk and cover up losses. But if his investment is short term or he is at a retirement age, the investment would be more conservative and will have less risk involved

Personality: This is nothing but the risk appetite i.e., how much risk can be handled by an individual. It depends highly on the individual’s personality

Investment Vs Savings

Though these words sound synonymous, there is a big difference in financial terms.

Saving is for emergency purpose and for taking care of short term goals. It has a low return but it is easily accessible.

Investment is seen as a long term goal and also the one that involves risk to provide a potential appreciation.

Understanding the difference between these two will provide more clarity in world of investment.

What is Investment and What is Not?

Some people even argue that gambling is a form of investment. But Gambling is NOT investment because when you gamble, you are putting your money at risk. An investment means that a thorough analysis is performed to make sure that there is a reasonable profit. Even though there are many risks involved in investment, it still requires hard work and is not achieved through mere luck.

Similarly, buying anything that depreciates over time is not an investment.

Types of Investment

Let us discuss in short the types of investment:

Ownership Investments: Ownership investment is done by investing on purchase of investments like stock, mutual fund and real estate. You become an owner or partial owner of the investment in which you take part in both profit and loss. Some of the Ownership investments are

• Common Stocks
• Real Estate
• Business
• Equity Mutual Funds
• Exchange-Traded Funds
• Commodities

Loanership/Lending Investments: This is loaning your money to someone and get a fixed or agreed upon income. In this case, even a savings account in a bank becomes a lending investment. Examples:

• Bonds
• Savings Account

If you want to become an investor, you can make use of investing resources like the financial newspapers, magazines or the internet and gain more knowledge on the field. If you want to seek help from someone, then a financial professional or a group of financial professionals will be able to guide you. One or a team of banker, insurance agent, a stock broker, a financial planner will be able to help you understand and invest in the right place.

The financial industry is indeed complex but there are lots of advisors available to help you choose the right investment.

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