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8 Questions To Ask Yourself Before Making An Investment

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There are a plethora of investment options in the market that promise opportunities for high returns. There are many instances where gullible investors are sold products by agents and bank employees that barely make any profit and do not come handy in meeting the needs of the buyer.

1. Do I understand how the investment works?
 

1. Do I understand how the investment works?

Just like any other business, asset management companies, banks and other financial institutions introduce new products every year, claiming to help its customers gain high interest or returns on their long saved, hard-earned money.

Amid long explanations using business jargons, common investors often fail to understand the underlying purpose of these hybrid investments and how the company will be generating the returns that it claims to give.

There are also shiny investment options in the market whose technicalities could be hard to grasp.

For example, in 2017, Bitcoin was the rage. As most failed to understand how cryptocurrency worked, thousands in India were duped by agents promising to multiply their money in the hot-new investment vehicle.

It is extremely important to understand the basis of any investment before you invest. If your banker or financial advisor is not helping you, hire a different person or carry out some research yourself.

If you aren't able to explain how the investment works to another person, you should keep your money away from it and invest in safer traditional options.

2. Will it help me achieve my financial goals and fit well with my existing investments?

2. Will it help me achieve my financial goals and fit well with my existing investments?

When you invest, invest with a purpose and not to plainly just make extra money.

For example, have dedicated investments to secure your family's future (like life insurance), health (mediclaim) and long-term needs (child's education, house, etc). With a clear goal (like how much do you want to set aside for child's education), you will be able to make strategic investments and claim tax deductions accordingly.

For example, if you wish to save for your daughter's future, you can invest in the Sukanya Samriddhi Scheme for high returns and tax exemption benefits. Similarly, you can choose a retirement centric product to build retirement corpus.

It does not make sense to invest in similar products and those that are not designed to serve the goal you want to cover.

Many Indians invest in LIC's endowment policies, which are basically life covers. Instead, you can get a term insurance plan for life cover and invest in a mutual fund separately.

3. What are the risks involved?
 

3. What are the risks involved?

It is very important to under the risks of losing your money while making an investment. Even if you may not be guaranteed high returns, you should not have to lose the invested amount.

Usually, financial institutions invest your money in market instruments that have an underlying asset linked to it. For example, equity mutual funds invest money in equities. These equities are further categorised as large cap, small cap, etc. Each categories have their associated risks based on the type of businesses the companies (whose shares have been bought), are exposed to.

Only by understanding the risks can you anticipate the returns you will make or lose.

It is wise to check the weather before you go sailing.

4. How much do I expect to earn from the investment?

4. How much do I expect to earn from the investment?

How important is the money you have set aside to make this investment? Can you stand to lose it? How much returns do you need to make to achieve the desire amount for your plans?

With clarity on questions like these, you will be able to plan your future expenses and goals financially.

5. How long can I hold on to the investment?

5. How long can I hold on to the investment?

If it is a retirement related financial need, you can stand to hold the investment till you turn 60 years of age.

Make similar calculations on how long you are willing to wait or continue making regular payments towards an investment to achieve your desired amount. When these questions are answered, you can accordingly pick an appropriate investment vehicle.

For example, it takes 15 years for a PPF (public provident fund) account to mature while a ELSS (Equity Linked Savings Scheme) comes with a 3-year lock-in period.

Both the instruments have tax-related benefits but the decision to pick one should be based on when you need the corpus from your accumulations.

6. Is the investment registered?

6. Is the investment registered?

There are multiple number of scams and ponzi schemes reported over the years. Fraudsters target gullible people whose sentiments can be manipulated based on their beliefs or relationships.

Court cases on these fraudsters take years to be resolved, giving you unnecessary financial and mental distress.

A thorough background check on the financial institution and their schemes is very very important before you commit to anything.

7. What can I do if the investment fails?

7. What can I do if the investment fails?

What are your options if the investment fails? Who can you approach to rectify the wrongdoing or get your money back?

You need to understand if the financial institution, that you are a customer with, is answerable to the RBI or the SEBI or IRDAI, so as to approach to for first-hand help. There are guidelines prescribed by these authorities that these businesses have to follow.

They also have their grievance redressal mechanisms to deal with the complaints.

8. What are my exit options?

8. What are my exit options?

Before you make an investment, ask about the lock-in period and the pre-mature withdrawal rules for when due to unfortunate circumstances you are unable to continue with the scheme.

Generally, schemes require the customers to continue for a minimum tenure before they can make withdrawals or lose any of their previously made contributions if they decide to discontinue.

Additionally, in cases like that of a mutual fund, you have to find out your exit options for when you are not satisfied by the returns earned by the fund manager. You need to know your options to switch to a different product or opt out of the fund manager all-together.

Always read the scheme related documents carefully before you sign.

As for life-insurance products, policies have a "free look" period of 10 to 15 days when you can walk-out of the policy without any questions asked or exit-load, if you are not happy with the product.

Story first published: Saturday, November 2, 2019, 15:18 [IST]
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