5Steps to become Smart investor

5-Steps to become Smart Investor Personalfn.com, Equty Master
Over the last couple of years, investor’s have witnessed two key developments in the financial markets – a stock market crash and declining of interest rates. These developments have only contributed to the uncertainty that surrounds an investment decision. In this article we have brought down five most important points one should consider before investing one’s earned money.

1. Investment Objective

The first step is setting your investment objective. Different people have different investment objectives depending on their wants and needs. The investment objective can be broken down into three parts - risk profile, investment horizon and return.

Risk profile – the investor needs to make a call on the amount of risk he is willing to take. For an investor willing to take high risk, one investment avenue could be an equity mutual fund. On the other hand investors wanting to expose themselves to minimal risk should look at instruments like the Savings Bond and the Relief Bond.

Investment horizon - specifying the duration for which the money needs to be invested is important. The investor can invest his funds for the short term (1-6 months), (medium term 6-24 months) or long-term (above 24 months). Knowing the duration one needs to invest for helps in optimizing returns. For example, an equity mutual fund will suit a person who wants to invest money for 3 years in a relatively high-risk instrument. A liquid fund, which is designed for very short-term investments, is not the right instrument for such an investor.

Income - this helps to determine the investor’s need for income, which could be monthly, quarterly, half yearly or annual income. There are various investments available across all the above categories and thus helps in selecting the right kind of instrument. For example, the MIPs are for investors looking for monthly income.

2. Right Asset Allocation

Once the investor has set his investment objective, he is in a better position to allocate his assets. Assets can be allocated in various investment instruments including Equities, Mutual funds, Fixed income, Gold, Real Estate, Forex etc. depending on his investment objective. Moreover, asset allocation also helps an investor to diversify his assets into various investment baskets. Kindly visit Your Asset Allocation Review to see your asset allocation.

3. Selecting the right investment consultant

Selecting the right investment consultant is one of the most important factors before making an investment decision. An investment consultant includes good advisors and quality of services provided both pre and post sales.

A good advisor is the one who studies various investment instruments, studies the investor’s objective and accordingly advises the investor. The most important thing in an advisor is that he should be certified for selling investment products. If you approach a consultant for a mutual fund investment he should have passed the AMFI (Association of Mutual funds of India) examination for selling mutual fund schemes. Similarly, IRDA (Insurance Regulatory and Development Authority) has made it mandatory to have the 100 hours training and clear an examination to become an insurance agent. Also, the investor needs to test the knowledge of the advisor so that he gets quality and the right advice.

The quality of service offered by the investment consultant should also be given importance before investing. Service includes the turnover time and various tools, which should be offered to the investor for tracking his investment and helping him analyze various investment products available in the market.

4. Tracking the investment


Very few people track their investment on a regular basis, which is a very important aspect of investing. If an investor tracks his investment on a regular basis he would know what his investments are worth as on that date. This will also help him analyze his investments i.e. whether he is attaining his investment objective or he is heading towards a wrong direction. Ideally such tracking tools should be provided by your consultant. (If you wish to track your investments of Equities, Mutual funds and other fixed income products kindly visit the Myplanner)

5. Churning the portfolio

An investor should not only track his portfolio but should churn the same depending on his objective and market scenario e.g. if ‘A’ had invested in an equity fund with an objective to get a 20% return and if he gains 20% return on his investment he should book profits. However, if it is a reverse scenario i.e. instead of a 20% gain he is making a loss for any reason he should either try to average out on his cost by investing further amount or should sell off and book the loss and try to invest in a better instrument.

Investing is a relatively simple process if one were to go about it systematically. A systematic approach brings in discipline that prevents one from getting carried away by the excessive optimism or pessimism that prevails in the markets from time to time. So the next time you wish to invest or evaluate your existing portfolio, do undertake this 5-step process and reap the benefits!