Steps to be a prudent investor

Planning to meet certain goals in your life by investing your savings? You can grow your wealth using the power of compounding, one of the most popular and effective methods used by investors to ensure good returns. But starting out as an investor can seem to be a daunting task, especially if you are transitioning from traditional methods of investment to more risky but potentially higher rewarding options. Here are a few steps that will help you to be a more prudent investor:

Research is key: Understanding the different kind of investment options that are on offer in the stock market. Investments can either be fixed-income based or market- linked. While market-linked investments (such as equity shares, mutual funds, ULIPs, NPS) help in navigating the volatility of a bullish or bearish market to help you generate good returns, fixed income investments (such as Treasury bonds, corporate bonds, certificates of deposit (CDs) and preferred stock) help in preserving your accumulated wealth to meet a desired goal. For example: an early retirement. Understand which will serve your purpose best and do your due diligence when narrowing in on a specific instrument.

Measure your risk appetite: General investor behaviour is to look out for high-performing funds that will give great returns in the short term. However, such plans do not exist. Invest knowing that risk and reward are inversely proportional. Have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments to avoid taking on too much risk that could lead you to panic and sell at the wrong time.

Calculate your estimated potential returns: Investors should refer to the earnings calculator that gives an estimate of how much you can earn from an investment. However, it is quite dangerous to make investment decisions based on expected returns alone. Before making any buying decisions, determine if the investments align with their portfolio goals and refer to the performance of the investment in the past to establish its stability. All of this data will be available since SEBI guidelines mandate that this information be shared with potential and existing investors.

Customise your asset allocation plan: Investors should focus more on the asset class in which they are investing as it is a crucial part in building their investment portfolio. . Asset allocation is an investment portfolio technique that aims to balance risk by dividing assets among major categories such as cash, bonds, stocks, real estate, and derivatives. Every asset class has different levels of return and risk, so ensure that you create a combination that will adhere to your risk appetite and align them with your long-term goals.

Set your investment strategy based on your intent, the current market climate, past performance of each investment opportunity and realistic predictions of future market behaviour. The tips suggested above are important to remember every time you make an investment.