A Basic Checklist: 5 Key Aspects to Check in Any Investment Before You Invest

Do you get confused what to look for from an investment scheme before you decide to invest?

Do you come to know about a few hidden and disappointing features of the investment scheme after you have invested?

Do you feel if there is ‘A basic checklist of 5 key aspects to verify before investing’ will help you make better investment decisions?

If you see yourself nodding your head while reading the above questions, saying “Yes, yes this is me you are talking about”, then you are definitely not alone. And just as other investors have benefitted from applying the key aspects in the checklist, you can as well.

You will discover how to select the right investments you deserve.

This extended understanding about investments helps resolve much of the frustration in dealing with investments. Misunderstandings can be quickly dissipated or avoided. Incorrect expectations are easily corrected. When you remember the key aspects to select the right investment for you, you will not be disappointed with your investments later.

If you understand the products completely and thoroughly, you can select them easily. It becomes a problem if you don’t do proper study before you invest. Hence ask these questions before you invest and you will be able to select the right financial products for yourself. Otherwise, it’s difficult to make a confident and firm financial decision.

Table of Contents

1. Motive/Objective
2. Yield
3. Threat
4. Liquidity
5. Expense

Now let’s see the questions to ask before buying or investing in a financial product.

1. Motive/Objective

What is your motive for buying a financial product?

Always do intentional investment.

First thing is to ask yourself the motive for buying a financial product. Assign a financial goal to it. When you do so, you feel accountable and be committed to it. If you buy a LIC policy, tell it’s for your family’s protection, if you tell it’s for tax saving, then chances of forgetting to pay the premium is very high. If you invest in PPF, tell it’s for your retirement. Suppose you start a SIP of Rs. 4,000 @ 10% in mutual funds. After 2 years, they are worth Rs. 1.06 lacs. Now there are two cases:

You assign a financial goal to it

(Say for eg you assign it for your child’s education)

Imagine you want to go on a vacation. Will you use that investment for the vacation? No! The investment will stop you from using it for any other purpose because you have assigned it for your child’s education. When you have a purpose for the investment, it is psychologically not easy to use it for other unimportant things.

You don’t assign a financial goal to it

Here, no reason is defined, and using it for a vacation seems to be right and so you go ahead and use it for the vacation.

From the above cases, we find that assigning it with a purpose helps. You use it only for that particular purpose. So you can assign it for the most essential needs, so you won’t use it on other trivial needs.

Action item:

• List all your existing investments and find out “What is the purpse of these investments?”
• Whenever you come across an investment scheme, ask yourself, “Which of my financial goal can be met with this investment scheme?”
• Whenever you have additional money to invest ad looking for investments, ask yourself, “ Which of my financial goal is a priority now? Towards which financial goal, this additional money needs to be diverted?” and then serach for the particular set of investment schemes that can serve that particular financial goal.

2. Yield

What is the yield you expect from your financial products?

Are you receiving the expected returns from your investments?

Consider looking at the after tax-returns and the rate of inflation while checking your expected returns.

If the post-tax and post-inflation return from your investment is positive, then you can consider retaining it. If it is negative, then you need to consider close it.

Action item:

• List the existing investments you have. Calculate the post-tax and post inflation return.
• Whenever you consider a new investment scheme, check the post-tax and post-infation returns and also check is there any other similar investment which is giving a better post-tax and post-inflation return.

3. Threat

What are the threats involved?

This may include the fluctuations in investments. You wouldn’t have understood the nature of the financial product and would be relying on the person who sold it to you.

Suppose a mutual fund appears promising. You need to know where it’s investing or how they choose the stock. They can give high returns, but the risk also will be high. They have a chance of vanishing returns, even in a bullish market (Bull market is where the prices are rising or expected to rise).

If you know what is the level of risk in a financial product and then invest. So you have already accepted a level of risk and you will also be knowing what will happen in the worst case.

Many complain that their investment value is going down during every market correction. The problem is not understanding the risk.

Read this to know: the major investment risks involved.

Action item:

• List the existing investments you have. Classify the risky investments and risk-free investments.
• Whenever you consider a new investment scheme, check the level of risk it has and also check is there any other similar investment which is giving a similar return with lower risk.

4. Liquidity

Is there liquidity in the financial products you are planning to buy?

See how easy the financial product is convertible into cash and also the flexibility to meet your financial goals. Check if there is any lock-in period or if you can exit at any time.

Many endowment policyholders do not know at the time of buying how much they can withdraw before the maturity period. This becomes critical when they discover how illiquid the product is in an emergency. What if you want to stop the policy and get back your money? You can get the liquidity details of any financial product easily in the product brochure or online.

Action items:

• List the existing investments you have. Check how easily the investment can be converted into cash.
• Whenever you consider a new investment scheme, check the liquidity period of the investment and also check is there any other similar investment which is having a better liquidity.

5. Expense

What are the expenses included in the financial product?

There is a cost to be paid at each stage for most financial products. Find how the cost is charged. These charges reduce your returns. Know all the charges and the total cost before investing.

The maximum complaints are about hidden costs. When many are not aware of the costs and later find out, they feel cheated. They feel that had they known about it, they would not have invested at all.

How long does it take to find out the cost structure of a product? Most products have their brochure online, you can find all the costs there.

Action items:

• List the existing investments you have. Check the expense ratio / fees/ charges they charge you.
• Whenever you consider a new investment scheme, check the cost of the investment and also check is there any other similar investment which is charging a lesser cost.

With this new awareness about the ‘Basic checklist of 5 key aspects to verify before investing’ you will have the tools you need to assess different investment options and to choose the right invest scheme which can help you meet your financial goals faster and better.

Also see: Questions to ask your bank relationship manager before investing.

Conclusion

Now you know the questions to ask before buying a financial product. You can ask yourself these questions before investing and you will never complain or worry after buying a financial product in the future. You can now invest in the best financial product suitable for you.

What are you waiting for? Go forth and plan your investments!