How to Make a Good Investment Decision?

It is time for people to move from traditional investment options to financial products in order to maximise the profitability and to increase the net worth. For which, one needs to understand the risk involved in the financial products and how to avoid the common errors in making effective and timely investment judgment.

Broadly financial instruments can be divided into two categories: listed and unlisted. While listed products can be traded on the exchanges and unlisted instruments shall be returned to the issuer after maturity of the instrument.

Unlisted instruments: Unit trusts and mutual funds, investment-linked assurance schemes, tax-free and structured investment products, mandatory and voluntary provident funds, retirement and pension funds, paper gold schemes, investment-linked deposits and unlisted shares and debentures.

Listed instruments: Exchange-traded funds, real estate investment trusts, close-ended funds (traded mutual funds), listed shares and debentures.

Let us discuss generally how one has to take an investment decision and issues considered to be vital for investment. However, the author is not explaining how to manage investment portfolio during volatile markets and also it is not an invitation for investment.

First, one should have a financial roadmap. It means, before taking any investment decision one should understand one’s financial situation, more so, if the prospective investor never prepared a financial plan earlier.  

Financial Roadmap

This is the first step while preparing for investment in any financial instrument. One has the figure out the investment goals and the capacity to withstand to risks. It is recommended to take the help of financial professional here. Mind you, there is no guarantee that one will make money from investments. Of course, by understanding the fact of investments and savings and draw an intelligent plant, one can able to secure the investment amount over the years and in the process manage in making some money.

Fixing the comfort zone

It is very vital task for the first-time investor. One should understand the risk involved in the invest option. If the intention is to buy shares or bonds or traded mutual funds – please understand that the investment in these instruments involve high-rate of risk including losing the amount in portion or full. Unlike fixed deposits with banks etc, the money invested in securities has no guarantees. One may lose even principal, leave alone interest.

But, if one is ready to take the risk, the return on this kind of investment is higher depending on period of the investment – long term investment options. And for the short term return options one can invest in cash-equivalent instruments.

Always try to find out appropriately a mix of investments with in one’s portfolio which will help against significant investment losses.