Know your goals and risk tolerance



It is said that the biggest risk to an investor's returns is the investor himself. This is because, as investors, we take a lot of impulsive decisions and do not follow fundamental rules of investing. Here are some basic rules to get optimal returns on your investments and live a comfortable life:

Have a financial road map

Before you make a financial decision, sit down and take an honest look at your entire financial situation, especially if you have not made a financial plan before. The first step to successful investing is figuring out your goals and risk tolerance, either on your own or with the help of a financial planner.

Evaluate your comfort zone in taking risks

All investments involve some degree of risk. The reward of taking risk is the potential for higher investment returns. If you have a long-term financial goal, you are likely to get better returns by investing in equity funds rather than restricting your investments to less riskier assets like FDs.

Consider risk of inflation & taxes

The biggest concern with less riskier assets is their inherent habit of generating negative real returns. That is, returns after adjusting for inflation and taxes. For example, Rs 100 deducted from your salary towards PF in 2005 is worth just Rs 97 now, even though it is tax-free. The worth of your FDs, which are taxable, is even worse.

Consider appropriate mix of investments

A mix of asset classes like bonds & equity funds, along with cash can help you to optimize your returns and also insulate you from losses during different market conditions. Historically , the market that was poor for one asset class was good for another.

Diversification

Don't put all your eggs in one basket. Remember to diversify your funds even within an asset class. That should help reduce your overall risk considerably .

Emergency fund: Always have an emergency fund that you can access in case of medical or job loss-related exigencies.

Pay off credit card debt

There is no asset class or investment strategy that can pay you a return that matches what is charged for credit card debt, which could be as high as 36% annually . So get rid of it.

Consider rupee cost averaging

Regular or periodic investments by way of SIP or STP will help you to invest in different market cycles and generate better returns.

This strategy can be used especially if you are investing for the long term and in equity funds. Rebalancing

This helps bring your portfolio back to your original asset allocation plan in case it deviates. This will help you book profit on the assets that have performed well and also buy assets cheap during slowdowns.

Avoid tips, assured and high returns

Every extra amount of return that is above the market return comes with some extra risk. So junk schemes which offer to double your money within a short span of time. Invest only in products from institutions regulated by the government.

Also remember while a financial planner might charge you a fee, he/ she will help you avoid the common mistakes to creating wealth, and reach your goals comfortably .