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How to decide where to invest your money?

Picking the right investment options can be tricky, as every investment option has its own pros and cons. Whether an investment is viable for you or not, depends on several factors such as returns, tenor, liquidity and how aligned an investment is with your goals.

Are you looking to pick the right investment option? Here’s a brief lowdown that can help you:

1.     List your financial goals and time horizon:

The first requirement of any investment strategy is knowing what goals you have in mind. The best way to implement your strategy would be to state your goals broadly and then divide them into small manageable goals. Not all the goals take the same amount of time to realize.

Taking a home loan to buy a property could take longer than investing in an FD to save up for your dream car. You can divide your goals into near-term, medium-term and long-term goals. You can later, set deadlines for when you think is the appropriate time frame to realize your investment goals.

2.     Consider how long you can stay invested:

Now consider which investment options fulfill the time frame and goal in the most profitable way. For example, say you’re considering fixed deposits. Compare bank and company FDs as per the FD interest rates. Use the FD calculator to compute your returns and then consider how much time you must stay invested for, to achieve the corpus you need. Remember that
wasting too much time on schemes that don’t offer good returns, means that it will
take you longer to achieve your near-term goals.

3.     Understand the various asset classes:

While remaining invested is good for your portfolio, the type of assets you have picked also makes a difference. Your investment basket should have a mix of various financial instruments in it for best results. So, learn about the three asset classes: equity or stocks, fixed income or bonds, and money market instruments.

There may be others added to this mix but knowing of these three will help you take more informed decisions about returns, risk, and market volatility. For example, keep in mind that fixed income investments in schemes like FDs work best in the short-term to beat inflation. Also read up on the common mistakes to avoid when investing in FDs to better equip yourself to earn more.

4.     Learn to minimize or balance risk:

There is a common cliché about the more risk you take, the higher your returns. This is not necessarily the case. Your appetite to take on a gamble will depend on a variety of factors such as your age, past experiences, goals, and so on. Even if you go strictly by safety and proceed cautiously, there is the risk that your net worth may not reach the target by the deadline you envisaged.

One important way of minimizing risk and maintaining a healthy balance in your investment portfolio is to not place all your bets in one financial instrument. So, you can include FDs, mutual funds, PPF, bonds, real estate, and other investments in your portfolio.

5.     Calculate the fees and taxes you pay too:

Every investment has a price and whether you know it or not, you are paying for it. Every seasoned investor who has tasted both victory and defeat in the pursuit of her financial goals will tell you that every rupee you invest matters as much as every rupee you save.

Even if you happen to make stupendous yields, you must also know how much you have paid in the form of fees and commissions to agents and other third parties as well as the taxes on your earnings. These fees may, at the first glance, appear to not amount to much but when added up they can dent your investment portfolio in a major way. The same applies to taxes. So, invest in a tax-saving schemes as well as high-earning schemes for best results.

Armed with these 5 tips, you can decide on the right investment options for yourself, even if you are consulting with a financial advisor and pave the way for financial freedom.
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