Things you must know before Investing

things to know before investing
things to know before investing

Before starting this article, there’s one thing that I’d like to mention and it is that investment is not an instance, not a one-time chance but instead it’s a process. A process of meticulously well-put-together decisions, and one can only make these important decisions only if he/she has the right information and knowledge. 

There are plenty of things to know that one must know before beginning their respective investment journey, and these things are as follows: 

  • Ask yourself “Where am I financially?” 

This question often goes unasked before one starts their financial journey, and it eventually comes back to haunt them. It is extremely important for any individual, whether looking to invest or not to have an understanding of his/her financial position. We need to sit down and make sense of our bills, our expenses – big or small, as well as our income. This helps us a clearer picture of how under or above water we currently are, in terms of finances. 

  • Know what is the significance of a DEMAT Account 

A Demat account or a dematerialized account assists in holding securities and shares in an electronic format. When an individual does trading in the market, the shares traded (Bought/Sold) are stored in the Demat account of that particular individual, thus eventually enabling an overall easy trading process. This account can be called an “all in one” package as it holds all the investments an individual makes, either in mutual funds, shares, government securities, or bonds, etc. Any investor seeking to invest needs to open a Demat account with a depository participant (DP) – who is basically any financial institution registered under SEBI and can be a stockbroker, a commercial bank, or even a foreign bank operating in India. A Demat account also acts as a vault as all your share certificates are present with you electronically and not physically and thus cannot be misplaced. 

  • Choose the best investment 

In every investment journey, it ultimately comes down to the investment itself. What mutual fund we eventually go with, what share we buy, what shares we choose to sell, etc. So there are plenty of factors that go into making this complicated-looking decision. First of which is the Risk Analysis accompanied by our Risk Appetite, which basically means how much risk can we actually handle and whether our selected fund’s risk is too much for us. Some people have a higher capacity to accommodate more risk than others. So it becomes extremely crucial to make the necessary risk analysis before choosing a mutual fund, investment opportunity, etc. Secondly is the alignment of the opportunity with your financial goals. Sometimes we end up investing in stocks or mutual funds which are nowhere remotely near the return we expected them to give us. Factoring in inflation while laying out our goals at different stages of our lives is extremely important because when we’re young we might look for quick returns but the smart choice would be long term investments, while we’re middle-aged we might be able to play with both long term and short term investments accompanied with substantial capital. One such example is that of selecting a mutual fund that suits our needs. Many factors go into deciding this, such as – Taxation which basically deals with the tax consequences of our investments or simply put the tax that will be accredited on our investments and whether they are manageable or not, secondly the track record of the fund house and the scheme.

  • Knowing the importance of Diversification in Investment  

As the name itself suggests, diversification aims at dividing and allocating funds to not just one investment stream or opportunity but instead allocating it to various suited fields and opportunities. It is one of the most regarded risk reduction techniques and is especially suited for beginners as here instead of putting all our balls in a single bag we are dividing them into multiple bags which eventually brings along the possibility of a certain return. Share prices may drop following a piece of unfavorable news, this is where portfolio diversification comes into play. In many cases diversification also aims to do damage control as it takes into account all financial possibilities, both the positive as well the negative. In simpler words, it aims at investing our funds in different sectors which shall react differently to the same event, thus maximizing returns and minimizing risks. An example can be of buying a stock in a healthier version of a fizzy drink as well in widely popular fizzy drink, so even if there is a lash back at the latter due to health issues or any reason, people will turn to the healthier version of it. This way we have minimized our losses while staying afloat. Diversification has its certain drawbacks as well, as not all stocks are of the same worth so countering one share by investing in another companies stock might not be as simple as it sounds and might require quite an amount of capital. Each and every stock is volatile and susceptible to both profits and losses, so diversification is one of the best ways to handle this volatility by putting one stock against the other. 

If an aspiring investor carefully and cautiously follows the above-mentioned steps, he/she is assured a “relatively less” bumpier ride that is the investment journey. 

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