Investing in stocks or any other form of instrument is always advised. While it is very rewarding, there is also a huge risk associated with them. So, it is important to keep yourself prepared for the worst-case scenario before investing. This article will talk about seven things you should do before investing.
Understand the Fundamentals of Investing:
If you don’t know how to invest in the stock market in India, it is best advised to understand the fundamental concepts. Before you begin your investing journey, make sure you understand the terms stocks, bonds, mutual funds, diversification, liquidity, volatility, and other investing fundamentals. You don’t have to be a finance nerd or an accountant to work here. However, you should be knowledgeable enough about the industry to make sound decisions.
Reduce High-Interest Debt:
First and foremost, please keep in mind that not all loans or debts are bad. We’re talking about high-interest debts here. For example, if you took out a personal loan, the interest rate could range between 13 and 18 per cent. Similarly, a credit card company may charge you even higher interest on unpaid balances. It makes little sense to invest if the profits from your investments are less than the interest you pay on your debts. For example, if your returns are 12 per cent and you’re paying 14 per cent in interest on your previous debt, you’re losing money overall. Instead of investing, it is preferable to use the funds to repay debts and become debt-free. Before you begin investing, try to reduce or eliminate debt, particularly high-interest debts and credit card debt. These interests have the potential to wipe out your investment profits.
Make a list of your goals and make a plan to achieve them:
One of the most important things to do before beginning to invest in the stock market is to define your investment goals/priorities and make plans to achieve them. You must understand why you are investing in this case. It will keep you motivated and ‘on track to reach your objectives. Now, by definition, an investment goal is a reasonable expectation of achieving predetermined returns over a specified time period by investing in predetermined funds. The words to remember here are “realistic expectations” and “timeframe.” Set your short-term and long-term goals and plan how you’ll achieve them before putting your money into any investment options. The goal can be person-specific, such as saving for children’s education, establishing a retirement fund, purchasing a new home, or achieving financial independence. Once you’ve determined your objectives, you can select the best investment options to help you achieve them within the time frame you’ve set.
Check Your Risk Tolerance Profile:
Everyone’s risk tolerance varies depending on their age, financial situation, priorities, and so on. If you are young and have a secure job, you may be willing to invest in unusual ‘high risk, high return’ options. However, as you get older/retire, you may need to rely on your retirement fund to cover your expenses. In this case, you may be unwilling to take a higher risk and prefer safer investment options. Before you invest, you should determine your risk sensitivity, or whether you have a high, moderate, or low-risk tolerance profile. Because different investment options carry varying degrees of risk, you can tailor your investment strategy to your risk tolerance. If you have a high-risk tolerance, you could invest in stocks, mutual funds, real estate, and so on. If, on the other hand, risky investments keep you awake at night, choose low-risk investment options such as fixed deposits, PPF, and bonds.
Purchase Health Insurance:
When people are in good physical health, it is natural for them to wonder why they should invest in health insurance. Paying a premium for health insurance may appear to be an unnecessary expense. Accidents or health issues, on the other hand, can occur at any time and place a significant financial and mental strain. Furthermore, it is a fact that as you get older, you develop health problems. As a result, it is critical to include healthcare planning in your family’s financial planning budget.
Create an Emergency Fund:
An emergency fund, as the name implies, is money set aside for emergencies. It is the money to which you can turn in an emergency to cover unforeseen and unexpected expenses such as the loss of a primary job, a medical emergency, personal emergencies, or even a car breakdown. As a general rule, before you begin investing for long-term goals, you should first establish an emergency fund that is at least three times your monthly expenses. Set aside this money in a separate account.
Make a budget and understand your cash flow:
If you want to live a financially healthy life, you must strike a balance between your savings and your expenses. Budgeting your monthly finances and understanding your ‘cash’ inflow and outflow can assist you in determining how much you can afford to invest each month. In this case, your total revenue (inflow) is the sum of all your income from various sources, such as your job, business, savings/fixed deposit interest, dividends, rental income, and so on. And your total expenses (outflow) include things like rent, groceries, transportation, bills, EMIs, household expenses, and so on. When you subtract your total expenses from your net revenue, you’ll be able to calculate how much money you keep each month or year. After you’ve calculated this, you can decide where to allocate your funds and how much to invest in various investment options.While the seven things mentioned above are necessary to do before investing, there is one more important factor that one must do. In order to invest in stocks online, one must have a Demat account.
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