Important questions every investor needs to find answer to before they start investing

Successful investing is not easy. Majority people do not succeed in making returns in the stock market because they do not have a framework around investing nor do they understand completely the risks associated with investing.

To name a few risks which exist in investing are volatility risk / liquidity risk / concentration risk/ reinvestment risk / human behaviour fallacies/ economic cycle risk/ currency risk.

Most of the investors who become unsuccessful are the ones who base their investing decisions solely on the quantum of returns they are chasing. The lure of higher returns pushes investors toward irrationality in decision making. They end throwing caution to wind and following herd behaviour.

It is during these euphoric times of market frenzy that investors fall prey to marketing campaigns run by wolves of wall street who know that when sentiment is extremely positive its lot easier to sell.

Promoters of companies line up IPOs and mutual funds flood the markets with new fund offers.

It is at such euphoric times that one needs to take precaution and look at valuations and other macro factors like economic cycles, interest rate cycle, dollar index, Gsec yield and others.

Have penned down a few important questions investors need to find answers to before they start investing. The list is not exhaustive, yet it sets you up in the right direction.

• What type of investor you are? A conservative / balanced / aggressive. Try choosing the investment vehicle accordingly.

• What is the objective of investing? Is it wealth creation or income generation or only wealth preservation. Have a pre-defined objective and clarity of thought. It will cut down a lot of noise from your investing process.

• Have you ever experienced market corrections? Corrections in equity markets can range from 15% to 50%

• Were you emotionally scared when markets dropped 20%-30%? Or was your mind telling you, it is an opportunity to invest at lower levels?

• Were you a buyer in equity markets during the previous correction?

• Did you exit at the time of last correction?

• Were you able to invest meaningfully when markets were down substantially?

• Will you be alright, if next one-year return is negative?

• Will you be comfortable if the next two-year return is nil? Or would you start seeing it as an opportunity lost in terms of Interest you could have earned.

Views are personal: The author – Lokesh Malhotra is a Wealth Specialist and co-founder of Simpy 3 Capital

Disclaimer: The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. There are no guaranteed or assured returns under any of the schemes of Tata mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.