In Summary:
- Before making any investment always check the legitimacy of the investment scheme.
- Never miss reading investment-related documents carefully.
- Always calculate the fees and expenses of the scheme. There may be some hidden charges that can affect your returns drastically.
- Investment schemes can be complex to understand. There is always a chance of missing something that you should be aware of before investing. Always seek professional advice before investing in any scheme.
With the advancement of technology investing has become so easy these days. You can invest in a lot of assets with just a few clicks. However, your hard-earned money is involved in this and any wrong decision may result in financial losses that can impact you in so many ways. To prevent this financial damage and to grow your money successfully you must be careful and keep a few things in mind. In this article, we will discuss few key things that you must care about while making any type of investment.
Verify The Legitimacy
Investment schemes come in various shapes and sizes laden with so much jargon. That can easily confuse an ordinary person. And this makes investment schemes a favourite turf for all kinds of fraudsters. They often make sophisticated legit-looking investment schemes to steal the money of investors. To safeguard yourself against these fraudsters you must verify the legitimacy of the investment scheme in which you are investing your money.
Verifying the legitimacy may involve many steps, like:
- Checking if a particular type of scheme is allowed to operate or not.
- If the scheme is properly registered with regulatory authorities.
- Is their business model legit and legal?
- What is the reputation of the person behind the scheme what is their past record?
It is always advisable to know which regulatory authority control that particular class of investment and who you should contact in case of something goes wrong.
Read Documents Carefully Before Signing It
With every investment scheme, there comes some documents that explain the details of that scheme. It might be presented in a way that only shows you the positives of the schemes and the negative terms and conditions may be written in very small fonts. It is an investor’s responsibility to go through all these minute details in the documents and understand them before signing.
There also may be some salespersons involved with the investment scheme and they try to sell you the scheme, hiding its negatives. In such cases never totally depend on the words of the salesperson. They work on a target basis and always want to sell the scheme to you no matter if it is suitable for you or not. So always read the information brochure yourself and also seek professional advice.
Keep Copies of Documents and Statements With You
You might have signed the documents of an investment scheme physically or digitally. It is always a good practice to keep copies of it with you. You may need it in future in case there is some discrepancy in that investment scheme. Also, note down your account and identification numbers associated with the scheme.
The statement of any investment shows the summary of the activity in your account for a specific time period. Always check the statements if they are showing correct information or not. Also, keep copies of these statements safe with you.
Consider Fees and Expenses of Investment Scheme
The impact of fees and expenses on an investment scheme can be significant, as they can eat into the overall returns of the investment. For example, if an investment generates a return of 12% per year but has fees and expenses that amount to 3% of the investment value per year, then the net return to the investor would be 9% per year. This is why it is important for investors to carefully consider the fees and expenses associated with any investment they are considering.
There also may be some hidden charges involved in the investment scheme. They are hidden because they may confuse the investor about the actual fee involved at different stages of the investment. Investor should see carefully if there are some hidden chareges and how they can impact the overall returns.
Always Seek Professional Advice
It is always advisable to seek professional advice before making an investment decision. Some major reasons to seek professional advice are:
- Expertise: A financial advisor or investment professional has the expertise and knowledge to help you make informed investment decisions based on your financial goals and risk tolerance.
- Diversification: A financial advisor can help you create a diversified investment portfolio that is tailored to your specific needs and goals. This can help to spread risk and potentially improve returns over the long term.
- Time-saving: Researching and analyzing potential investments can be time-consuming. A financial advisor can do this for you, freeing up your time to focus on other things.
Analyse Your Risk Profile
An investor’s risk profile is his willingness and capacity to take the risk. It shows how much risk the investor can take. The risk profile of every individual is different and depends heavily on his age, income and financial goals. Every investment exposes the individual investor to a certain level of risk and this risk must be compatible with his risk profile. For example, if an individual is in his retirement age and invests in risky assets, it will be very difficult for him to recover financial losses because he is no longer working and unable to earn more money to cover those losses. On the other hand, a younger investor can take more risks as he can cover his losses by earning more money.
This is the reason why every investor should know his risk profile and must analyse if the particular type of investment is suitable for him or not. Investments can vary in their level of risk they can be safer ones like Fixed Deposits, Public Provident Funds (PPF), and Gold to risky ones like Stocks, Bonds, Mid and Small Cap Mutual Funds etc.
Analyse the Liquidity of the Investment
Liquidity refers to the ability to sell an asset quickly and easily, without significantly affecting the asset’s value. If an investment has low liquidity, it may take longer to find a good buyer when you need to sell it, which can be a problem if you need to access your money quickly. For example, a real estate investment is low liquidity asset it may take several weeks to months to find a good buyer, on the other hand, the stock of a large-cap company is having high liquidity you can sell it instantly on a stock exchange.
An investor must consider the liquidity aspect of an investment and the portfolio should not have a large chunk of illiquid assets.
Conclusion
Making an investment decision is an essential part of every investor’s life but this should be done with some care and with proper planning. Wise investors stay careful while making any investment decision. Either it is analysing the safety aspect of the investment or taking steps to make your investment successful. The prudent investor tries to do this all by balancing his risk while also generating wealth with his investments. So it is a good practice to analyse the safety, risk and potential of return on any investment. Also investor should not decide out of greed as greedy investors often fall victim to financial frauds.
