3 Factors to consider before investing

I get numerous emails which can be generalize in the form of

I want to invest <some number> amount in equity market for some X months. Let me know how can I best use my <some number> amount in X months of time.

First I would like to say that I am not an investment expert and I mainly do lot of equity based investments and so all I can suggest is numerous ways to loose money probably. 😀

Jokes apart and with all due respect to all users who emailed me their queries I think instead of me saying what you should be doing I prefer to share things which can help you take such decisions on your own and so today I will share some of the factors which can help you take your own investment decisions wisely.

1. Invest in Loan

I am a firm believer that we should always go with a No Loan situation to the extent possible. I many a times even get lots of information where people plan to invest despite having a home loan. If you want to invest do that on your Loan by reducing it.

There is nothing bigger investment than investing in your loan.

There are many to whom I give the same suggestion. Some agree but those who argue talk about arbitrage where they are getting money on low interest and can earn handsome amount somewhere else. If you are thinking in the same line read further.

If you can reduce your expense by reducing part of your EMI it is direct month on month earning. To understand this in more detail let us take an example. Let’s say you have an EMI of Rs. 10,000. Now by paying some part of your loan you reduce your EMI to Rs 8,000. This actually means you have invested in a way to earn Rs 2,000 per month. After all a penny saved is a penny earned.

This is not all when people argue. There are others as well who support of not pre-paying loans because of prepay fees. This is just a mental block for feeble minded people. If you calculate you may actually pay less as prepay fees than the total interest you may pay. I don’t have exact numbers as I have never ever taken any credit card debt or EMI for myself but you can calculate that for yourself.

2. Know your Risk

I have seen many people ask me question where can I double my money in some months. If I knew that why on earth I will tell you and not do it myself. There is nothing called return when it comes to investment. It is more about your objective. Tax Saving, Life Insurance or anything else.

Many think that risk is only when investing in equity market but actually that is not true. You may have a risk by investing in most secured life insurance as well. According to me Life Insurance is something where you live poorly so you can die rich. That’s a risk for me.

It is much better to know about the risk of investing than return on your investment.

3. Forget Trading

You know that your friend has doubled his money in few months. It’s good to listen to him but not follow him because he may have many factors for doing that and you may not have the same kind factor and specially luck and broker like him.

I always prefer to invest in a way that I can double my gains. Remember I told gains and not capital.

There is a BIG difference!!!

With gain what I mean is I set a benchmark. Say a Fixed deposit. Now I target to double my gains from equity based investment. Say FD gives me 8% annually and so I target 15% return in equity. If I get that much gain before a year’s time I plan to switch.

I will be excited to know your views on the above and also if there is something more that you can add to it.