Are you new to investing or curious to know the basics of stock market investing? When it comes to investing in mutual funds, you should have some basic knowledge of capital markets.
Whether you are salaried, self-employed, or a businessman, everyone can invest in stocks, bonds, or mutual funds to make higher returns as compared to other traditional investments like fixed income securities.
In this article, we will discuss the four major parameters which have to be taken care of before investing in mutual funds or stocks.
- Risk Involved
- Rate of Returns
- Volatility in Investment
These are the things that must be analyzed before making any investment whether in the capital market or fixed investment securities or any other securities. Let me explain it all one by one in brief.
1. Risk Involved
The first and foremost thing which you need to assess is the risk involved in the investment. When it comes to directly invest in the stocks or shares of any company, there would always be a higher risk as we all know that the stock market is highly volatile.
Nevertheless, if you have decided to invest in equity and don’t have any experience in stock market investing, you should start with mutual funds. However, if you invest in debt securities, you would bear a low risk as compared to stocks and mutual funds.
2. Rate of Returns:
The second important thing is how much you are going to earn as a return on your investment. Whenever we talk about returns, it means the rate of returns in the long term (5 to 10 years). You will know that more risk means more probability of profit.
Therefore, if you invest in equity, you’re more likely to make higher returns, however, in the case of mutual funds, returns are moderate.
Moreover, if you invest in debt securities like bonds, debentures, debt funds or fixed deposits, the returns of investment will be lower.
3. Volatility in Investment
You need to analyze the previous years’ data of particular securities before coming to any conclusion because maybe any stocks have provided higher returns in any financial year. You should study the entire history of returns of any securities especially in the case of stocks, mutual funds, or debentures.
You should pick such stocks or mutual funds which have provided consistent returns for the last 10 years. Thus volatility in investment is also a significant factor whenever you even think about investing.
Liquidity of investment is also equally important as the above factors are because your ultimate goal is to make returns and at the same time your money can be withdrawn whenever you require. Therefore, you should invest in those securities which are highly liquid.
You should also consider how easily you can take your money back along with expected returns.
Thus if you invest in stocks or mutual funds, the liquidity would be high, however, if you invest in debt or government securities like government bonds, you will have to wait till the maturity date of the instruments.
There are plenty of options available, you can choose any one of them which fit as per your requirements, risk-taking ability, and expected returns. Don’t forget stock market investing is a highly risky and unpredictable market wherein the prices or any securities are determined by the demand and supply theory.
Therefore, you should use your conscience before investing in the stock market. This article is for information purposes only.
Hey, this is Raj Vardhan an entrepreneur, sales, and marketing expert. I did a BSc. from the University of Allahabad and did MBA (IB & Finance) in 2008 from the University of Lucknow. I worked with the most renowned MNCs and have experience of more than 10 years in marketing, finance, and entrepreneurship.
I like to share my experience and knowledge through www.thesisbusiness.com, a website simplifying and delivering excellent knowledge regarding business, banking & finance.