How to invest effectively?

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How to invest effectively?
Making smart investments often seems to be a complex activity requiring extensive financial knowledge. While it helps to have some financial expertise, making effective financial decisions is not rocket science. It is important, however, to start investing right away. You may feel that your finances are not sufficient to permit investing, but even small amounts can be directed into investment products; over a period of time, even these small investments will bear fruit.

While there is no single way to becoming a successful investor, the following tips will help you grow your money in an effective way.

Pay off those Debts

High-interest debts-such as credit card debts-can really eat into your income. Personal loans and credit cards are best paid off; otherwise, you could be saddled with high double-digit interest on the outstanding amounts. By paying off these debts, you also free up more money for saving and investing, thereby creating a situation where you can consider solid investment products without having to stress about unpaid debt.

For example, when deciding between buying a fixed deposit with an interest rate of nine percent and paying off a personal loan that charges 15 percent interest, the latter is the better option. Do the math and determine whether the difference between the rates of interest charged and earned make you the winner or loser, and then make your choice.

Make an Investment Plan

Rather than make mental notes regarding your investment plans, list them out. Seeing your investment goals written down will give you some clarity on how and where to save and invest money. While putting together this investment plan, think about your cash flow and future goals.

You should ideally maintain about six months' worth of monthly costs in a savings bank account or, if possible, in a sweep-in fixed deposit (the latter promises higher interest rates). Then, depending on your risk appetite, cash flows and future goals, invest in a mix of investment options, whether fixed income products, equity, commodities, real estate or insurance. Insurance should appear as an early step for risk protection, and only later on be used for investment purposes.

If you have future goals-for example, retirement planning, funding your child's education, a world tour, etc.-factor in the time of maturity and long- or short-term returns potential of the investment products that you choose.

Examine Risks, Returns and Taxation

Many newbie investors tend to underestimate the risks and/or overestimate the potential returns from an investment product. For instance, the equity markets are always fraught with risk and even high returns can be negated when the market turns bad. Thus, investors are advised to spread their capital over various kinds of investments to minimize this risk. While equity promises high returns but at high risk, instruments like fixed deposits, PPF and tax-free bonds promise moderate returns at low risk. The smart investor uses a mix of such instruments, while also factoring in the net returns following taxation.

As your financial requirements change, so too should your investment targets. Therefore, it is best to calculate the actual net returns, maintain easy records of your investment details-including sum assured, rate of returns, maturity, etc.-and factor these in when adding to your investment portfolio.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may contact him directly on Twitter: @dyohannan

Read more about: investment
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