Most people tend to shy away from investments as there are a plethora of options, and it all gets quite confusing.
And for new recruits, it will do well to start early in life with their investment plans. It always helps later in life. In the previous article titled: Choosing the right investment avenue, I had provided you with an overview of some investment options. In this article, I layout some ground rules about how to picking one.
Apart from the past performance it might also be worthwhile to compare the fund charges of various funds as they are not fixed. Obviously, the fund with lower charges and a good past performance is preferable. Another important factor in mutual fund investments is entry and exit load. These are charges deducted from your investment when purchasing and selling the units of any fund. In case you need to redeem your mutual fund investments to address an urgent need, a high exit load will affect your net returns.
There are various ways to invest in a mutual fund. One can invest a lump sum of money at one shot or do periodic investments. Systematic Investment Plans (SIP) is advisable for investors who are starting off and is a good alternative to a recurring deposit. All these decisions require some basic information gathering and educating yourself before taking the plunge and putting your money into any mutual fund.
Research and understand
The next level of high risk and high reward is to directly invest in the stock markets by buying and selling shares. This calls for a lot of study and analysis about the company, the economic situation, etc. The biggest pitfall in this investment option is to assume that one can buy and sell any leading share and make money overnight. There are enough stories of people losing enormous sums of money because they purchased a share based on a tip or because someone suggested the same. Although, taking such inputs is worthwhile, the final investment should be backed by a research and understanding of that company and its stock. It is a common and oft repeated story of investors rushing to buy stocks and mutual funds when the stock markets are going up and trying to sell the same when it collapses. Both are equally wrong.
Lastly, is the point about insurance. Technically they are not investments. Even the Unit Linked Plans (ULIPs) have two parts to it. One is the insurance and the other is a mutual fund investment which is supposed to generate returns to cover the premium charges of the insured amount. ULIPs are debatable as an investment option because of the high initial charges which are deducted from the investor. T
Case for ULIPs
The common argument against ULIPs is that the investor can invest the same amount in a far better performing mutual fund and pay the premium for a normal insurance out of the dividends being declared by that fund. On the other hand, if one stays invested in a ULIP, for a fairly long period of time and the fund is managed well, the initial charges gets averaged out and the returns might actually be good.
One should choose the investment options on the basis of their readiness to invest time and effort in understanding about that investment and more importantly based on their appetite for risk. A prudent approach is to have a mix of zero risk and medium risk options during the early part of one’s career. Then start increasing their high risk investments after a few years of working with adequate research and understanding of such investment options.
Ultimately shift back to safe options towards the end of their career. Regardless of the investment options you chose; always remember terms and conditions apply.
To read more from the Out of Syllabus section, click here .