This is the first article in the series of investor diaries: A series to track the journey of an individual investor right from the start to the end.
As an investor here’s what all you need to do before investing:
#1. The first step is to draw a financial roadmap evaluating your financial situation either by yourself or consulting an expert. Figure out what your investment goals are:
- You could be investing for Safety: Bank deposits are a good option
- You could be investing for a steady source of Income: Bonds that give regular interest could be an option
- You could be investing for your money to Grow: Stocks or Mutual Funds are good options
Or you could be investing for any of the above two or any of the above three. But always remember if you’re new to investments it is advisable to consult an expert or professional first.
#2. After deciding your goals, consider your risk taking capacity.
If you are planning to invest in stocks, bonds, and mutual funds, know that they are risky and you could lose some or all of your money in them. But sometimes greater risks yield greater benefits.
There are 3 major assets where you can invest-stocks, bonds and cash. Historically, the returns of all 3 have never come down at the same time. That’s why it’s safe to invest in a variety of assets so that even if one goes down the other keeps the portfolio ride smoothly. You must have heard people say ‘Don’t Keep All Your Eggs In One Basket’. Investing works like that too! To understand this better read: Coffee With A Portfolio Manager
#3. After deciding where you want to invest, you might wonder how to pick the right stock?
Steps To Pick The Right Stock:
- Find a growing sector in the economy. For e.g. It could be The Banking sector or the Real estate sector
- After that pick the leading company in that sector
- Try buying that company at a cheap price so that you can profit when the price rises
For people who are beginners in the stock market, it is better if they invest in stocks through a mutual funds scheme, here’s how:
Invest in low-cost funds that allow you to invest in a basket of stocks belonging to one of the major indices, such as the Nifty, Sensex, Nifty Junior, S&P 500, and so on. Investors don’t have to worry about choosing the best fund or fund manager when they invest in these funds (Popularly referred to as Passive Funds). Once you have lived with these passive funds for a couple of years, tested your ability to hold on to equities in declining markets, and educated yourself about how to choose the right funds, you may graduate to investing in other active funds.- Economic Times.
#4. Before you invest, create an emergency fund for calamities like sudden unemployment.
#5. If you hire a financial advisor to help with your investments make sure your honest and open about your actual financial condition with him and then only can she/he guide you accordingly. Asking him questions will help in clearing all concepts.
That was your role as an investor before investing. Stay Tuned for the next article in this series that will cover: What you need to do after investing in the Stock Markets.
For further questions on your role before investing, you can email us at email@example.com