5 key factors to check before choosing an investment plan (2024)

Fast forward to the present, the attitude towards investment is vastly different. The commoditization of the smartphone, coupled with the uniquity of cheap internet has made investing viable and accessible to a large portion of Indians. What was earlier a problem of scarcity, has now turned into one of abundance. When you have a seemingly endless list of options to choose from and competing advice that seem to cancel each other out, how does one go about picking and choosing their investments?

Fortunately, investing is an endeavor where the basics remain the same. If you have a clear understanding of who you are, what your goals are, and where you stand in relation to them, all you have to do is evaluate any potential option across 5 categories to see if they suit your needs. Here they are, in no particular order:

1. Return on Investment (ROI)

ROI is often considered to be the holy grail of all metrics when it comes to assembling one’s portfolio. Government bonds and fixed deposits have always been the darlings of the Indian middle class because of the safety and stability that they guarantee. The stock market is the refuge of the daring as they trade in safety and stability for chances of exceedingly high returns, with chances of going bust as well.

Every opportunity that comes your way needs to be measured with its expected ROI, in relation to your predicament. What this means is that the lifestyle you choose to lead for the rest of your life will determine the amount of money you require, which in turn would guide how you go about choosing your investments.

If you find all this overwhelming and just want a basic thumb rule to start with, it’s a good idea to pick a vehicle that is expected to grow at a pace that outstrips the average inflation rate over the past few decades. In India, the prices have crept up at an average of 7% over the last 40 years. This means that your ROI should be no less than 7% for your investments to make sense.

2. Cost

Typically, the investments that come with high upsides also require the investor to commit a hefty amount of cash upfront, and those that come with moderate gains are more reasonably priced. Every investor must keep this relationship in mind while committing their hard-earned capital.

The popular 50:30:20 rule of personal finance advocates that you spend 50% of your income on needs, 30% on wants, and 20% on investments. If you’re new to investing, it’s usually best to cap the maximum amount that you want to invest to 20% of your overall income. This will ensure that you aren’t overleveraged, the likes of which could wipe out your entire savings in case of a market downturn.

3. Time to Goals

Goal-based planning is considered a cornerstone of personal investing and many investing platforms that have popped up today take this into account before recommending investment buckets to their users. The time horizon that each of your goals operates in would dictate the boundaries of the investment strategy that you consider for each of them.

Long-term goals, especially if you are starting out early allow you to take on more risk with the aim of increasing your upside (this mostly means your portfolio would contain more equity than debt). Medium-term goals might be more balanced when it comes to risky bets, while short-term goals would generally require that you play it safe.

4. Tax Considerations

Managing taxation as an investor is a supremely complex issue and it is for this very reason that amateur investors are recommended to work with an experienced chartered accountant to minimize the impact of taxation on their investment gains. Many actively look for tax-free investment options, the likes of which are generally limited to pension schemes, insurance, and government-sponsored savings schemes.

If you do intend on investing in mutual funds, stocks, and other such financial instruments, it is best to understand how the law recognizes and taxes gains. LTCG (Long-term capital gains) are equity delivery-based instruments with holding periods of longer than a year, while STCG (short-term capital gains) are those with holding periods of less than a year. The difference between both of these is huge as STCG is taxed at 15% while LTCG can be completely exempt.

5. Liquidity

Fortune and misfortune can visit us at any time and it’s imperative that you prepare for events both good and bad as things can go south at almost any time. Such situations demand a certain level of liquidity in your investment portfolio, after all, what good is money if you can’t withdraw it at a time of your choosing?

Short-term investments generally tend to be highly liquid and are excellent places to park your cash. Recurring deposits, liquidity-debt funds, and large-cap mutual funds are some examples of highly liquid investment options where money can be withdrawn almost immediately.

Author: Yashoraj Tyagi, Chief Technology Officer & Chef Business Officer - CASHe

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Published: 23 Dec 2022, 08:27 PM IST