Individuals having different income levels want to use their idle funds (left after meeting all the obligations) in useful way to generate some income for their future. Most people prefer to keep the idle cash in savings accounts, some prefer investment and other spend it on various variable expenses. The people who want to invest their idle funds should take into account following tips for doing smart personal investments. There are many tips for smart investment, of them few important tips are discussed below.
- Understanding the difference between investment and savings
The person should understand the difference between personal savings and investment; savings are usually for short-term events such as loan repayments, fee payments, un-expected medical bills, vacation plans or any financial emergency. Investments are for long-term, at least for three years, such as pension funds and insurance payments. Savings are mainly kept in the form of cash or in the current accounts having low risk. Here low risk refers to the loss of money value due to inflation, otherwise cash and current accounts are risk free. Investments carry risk of default and loss of value but can results in the higher rate of returns.
- Calculate the personal present worth and invest idle funds only
Personal financial net worth is calculated by the difference between assets and liabilities. Assets includes house, farm-house, land, bullion, bonds, equity and debentures, fixed deposits, insurance, mutual funds, provident fund, amount in the savings account, cash in hand, amount in current account and other investments. Liabilities include house hold expenses, mortgage payments, auto financing payments, personal or consumer loans, un-paid bills and credit card outstanding. A positive net worth shows that person has assets greater than liabilities would allow financial flexibility for investments. Before going for investment person should build an emergency fund for unexpected medical bills or other unexpected events. After paying off all expenses and emergency fund amount, person can invest the remaining funds. If person left with no funds at the end but still want to invest by sacrificing any of the expenses, loan repayment or emergency fund payments then it can result in loss for person because investments are for long-term and can not sell in short run, unless sold on lower prices. So, person should invest only those funds which are left after meeting all the expenses and emergency savings need.
- Individual must have clear investment goals
Smart investment represents investment with a clear purpose or goal. For example: goal to have desired retirement plan, house buy, funds for children etc. Clarity of goals makes it easy to develop investment plan and its execution otherwise without proper goal individual spend funds in variable expenses.
- Do not go for the high return
One of the main mistake that personal investor do is to grab the highest return possible. Personal investors mainly go for the highest possible return, because personal investment is more of making low risk, well-informed and realistic investments. One of the main mistakes that personal investors do is to follow the stocks that are performing well and are overpriced. Investors predict that the stock will go further up but it falls and move back to its equilibrium price. This results in greater losses to the personal investors. Therefore, personal investor should not follow the overpriced stocks because of high risk associated with their price movements.
- Specify your risk tolerance ability
Only invest in those investments whose risk can be bearded by person, do not invest in those that awake you at night, no matter how higher return they are providing. Therefore, first specify your risk bearing ability and invest accordingly.
- Information relating working of different investments
Individual should first get all the relevant information relating the working of different investment options available in the market, possible returns, risk and techniques of combining different investment options to form portfolio for person desired return.
- Hold realistic market expectations
Individual should understand average market returns, this will help person in understanding movements and fluctuations in the market return, enabling the person keep going when market is down.
- Follow a personal investment plan
Always invest according to the personal investment plan. Do not invest in those which do not fit into your investment plan.
- Diversify your investments
One of the main rule of investment is to “do not put all your eggs in one basket”. This means that do not invest in one specific sector investment options. Invest in different sector investment options (diversification) according to personal investment plan, because if one sector performs badly, good performance in other sector can compensate for it. If all the investments are made in one specific sector than bad performance of that sector can lead to the high risk and losses. Therefore investor should invest in different sector investment options to reduce the risk associated with overall investment return.
- Stay in the market during bad time
One of the common mistakes that investors do is to go for the investments when prices are going up and market is performing well (bearish market) and pull out when prices go down (bearish market). In simple words investors buys when prices are going up or high and sell when prices are going down. As discussed above if personal investors invest according to investment plan then they would not be buying at high prices and selling at low prices. If investor do mistake by purchasing high then should have to wait for the prices to go up again but the prices will take time to go up or rather can stay at the lower levels, in such cases investors has to be patient and has to look for better opportunities.
- Pay attention to investment expenses
Personal investor can not control the market returns but has control over the expenses of investment. Personal investor should prefer the low-cost investment opportunities such as low-cost index funds, the low-cost investments are most of the times are best performer in the investments.
- Monitor and change investment plan
The personal financial plan should be monitored at the end of month or year to check whether everything is going according to the plan or not. If results deviate from the plan then proper measures are taken to get desired results. These measures may include the revision of investment plan or change in the risk level.
- Do not go for frequent buying and selling of investments.
- Give a consideration to the newly offered investments in the market, if there is some thing unique or has a chance of growth.