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10 things you should do before you start Investing

ICICIdirect 7 Mins 14 Jul 2023

Everyone wants to have a 10X stock in their portfolio, see mutual funds returns at 18% XIRR, and create wealth. However, if you want to reach Europe for your dream vacation and don't plan for it, the probability of you having an ideal vacation is less. Before you board the plane, you need to prepare for many things. Similarly, there are a lot of things you need to do before you start investing. Sadly, most investor start without planning and preparation. Hence their journey is not smooth.

Today, we will discuss the top 10 points you must take care of before investing your first penny in any asset class.

Things to do before investing

Here are the ten things to take care of:

Set Financial Goals

Determine your financial goals and investment objectives - why do you want to invest? Unless you have clear answers, you should not invest. Are you investing for long-term growth, retirement, or short-term gains? Clearly defining your goals will help you select appropriate investment options. It will also help you decide to pick investing strategy. For example, for short-term gains, you need to take a trading route, and the strategy is entirely different for it compared to long-term growth goals.

Understand Risk Appetite

Assess your risk tolerance level. Investments involve varying degrees of risk, and it's crucial to understand how comfortable you are with potential losses. It will guide your investment decisions and asset allocation. You need to know whether you are a conservative, moderate, or aggressive investor. You can be somewhere in the middle. You can evaluate your risk profile by checking online tools.

Educate Yourself

Explore various investment options available. Some investment vehicles include stocks, mutual funds, exchange-traded funds (ETFs), bonds, fixed deposits, real estate investment trusts (REITs), and public provident funds (PPF). Understand the features, risks, and potential returns associated with each option. Stay updated with market trends and news. Do note that learning is an ongoing process - you cannot sit down for 50 hours and say you have learned about different investment options. You need to start with the basics and then continue your learning journey.

Research Indian Economy

Study the Indian economy and its growth prospects. Look into factors like GDP growth, inflation rates, government policies, and reforms. Familiarize yourself with India's political stability, business environment, and regulatory framework.

Understand the Regulatory Environment

Familiarize yourself with the regulatory framework governing investments in India. Learn about the Securities and Exchange Board of India (SEBI), which regulates the securities market, and other relevant regulatory bodies. It will help you understand the rules, requirements, and restrictions applicable to your investments.

Create a Diversified Portfolio

Diversification is key to managing risk. Spread your investments across different asset classes, sectors, and geographic regions. The approach helps reduce the impact of any individual investment's performance on your overall portfolio. You can start with debt and equity. Within equity, you can diversify between sectors and market size. Once you have taken care of it, you can shift focus to the international market, gold, and real estate for diversification.

Understand Tax Implications

Gain knowledge of the tax system and its impact on your investments. Learn about tax rates, deductions, exemptions, and any applicable international tax agreements. It will help you plan your investments more effectively. Assume an asset class offers an average of 10% returns, but the gains are taxed at 30%. Another asset offers you 8%, but the gains are tax exempted. Which is a better option in this case? Find answers to these questions. For that, you need to understand the tax implication of each asset.

Open a Demat Account

To invest in securities, you'll need to have a bank account. You can open a Demat account (a digital account to hold shares and securities). Choose a registered Depository Participant (DP) for your Demat account.

Research Investment Options

Thoroughly research and evaluate investment options. Consider factors such as historical performance, financial ratios, management quality, and growth prospects of companies. Additionally, explore mutual funds, government bonds, and real estate opportunities.

Start Small and Monitor Progress

Begin with small investments as you familiarize yourself with the market. Monitor your investments regularly, keeping an eye on market conditions, news, and any changes in your financial goals. It will allow you to make adjustments as needed. 

Before you go

Investing in any market and asset class carries risks, and it's crucial to conduct thorough research and due diligence before making investment decisions. The only thing we would say to close is that don't wait for the right moment to get started. Take care of the above points and get started with your investing journey.

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