Investing for Beginners - A Checklist

Investing for Beginners - A Checklist

"Do not save what is left after spending, but spend what is left after saving." - Warren Buffet, American business magnate, investor and philanthropist; considered to be the most successful investor in the world.

Ready to take your first step towards a financially secure future? A good investment idea will only become a winning investment once it has been through a series of litmus tests to ensure that it is the RIGHT idea for you. Here is a quick checklist that will help you evaluate all your decisions and ensure that your investments are in line with your financial goals and risk appetite.

1. After how much time would you need this money back? Could you possibly need it before that time, in case of an emergency?

Even before you can make your first investment, you should have a basic financial plan in place. Among other things, the plan will help you decide if a particular investments is a good fit for your existing investment portfolio. Your choice also depends on when you need the money back, as different investments are suitable for different time horizons. A number of products also have a lock-in period and/or heavy penalties for withdrawing funds prematurely. You must be aware of when you could need these funds in the future and whether this product fits those requirements.

Create your own Financial Plan in five minutes.

2. How much risk are you willing to take with this money? Is this investment within your acceptable risk limit?

What happens if the investment doesn't perform as expected and you end up losing a part of your money? Do you need this money for some future financial liability? The answers to these questions also depend on your existing investment portfolio. It is important to view each investment as a subset of your larger portfolio, with the sole aim of maximizing long-term returns and minimizing your risk. At the same time, each investment must also fall within the risk limit acceptable to you.

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3. What is your expected return from this investment? Has this product provided similar returns in the past 5-10 years?

Even though past performance is not a guarantee of future returns, you should always make sure that your expected returns are in line with how the investment has performed in the past. If the investment has performed exceptionally well in the last 6 months, it is unreasonable to assume that it will continue to do so in the future.

4. Do you know how much fees you will be charged upfront and on an ongoing basis?

New investors make the mistake of not taking fees and other charges into account when calculating expected returns from an investment. A lot of products look very attractive before deducting all the explicit and hidden fees and charges from the returns.

5. Do you know the tax implications of this investment? Have you considered the net returns after deducting tax?

Just like fees, taxes also play an important role in deciding whether an investment meets your requirements. You should carefully assess whether the investment is tax deductible, and whether the interest, dividends and final returns from the investment are taxable or not.