Investment choices vary from investor to investor depending on their goals, risk tolerance and individual personality. But, there are certain common factors that affect everyone’s investment decisions.
Whether you make investment decisions on your own or rely on professional help, knowing the factors that affect your investment decision is essential to maximize your portfolio return.
Factors affecting investment decisions are:
▪ Net worth
Your family’s wealth or net worth plays a major role in investment decision-making. For example, two friends with similar salaries can have completely different family background and thus completely different investment patterns. Someone from a wealthy family would easily be able to take exposure in equity without having the fear of losing a part of the portfolio while another person with limited means might be more conservative in nature.
Tip: So, your family’s net worth needs to be considered while taking investment decisions.
▪ Risk appetite
If you are one of those who lose their sleep if the investment portfolio goes below your invested amount even for a day, then equity is not your forte. Your willingness to take risk affects your investment choices. For example, if you are comfortable with daily volatility of the market, you can consider to build an aggressive portfolio.
Tip: You can slowly start equity investments with MIPs, balanced funds, etc. before plunging into equity-oriented options like equity mutual funds, stocks and unit-linked insurance plans (ULIPs).
▪ Time horizon
A longer time horizon allows you the opportunity to invest in relatively riskier options like stock. That’s because the volatility of stocks usually flatten over time. However, if you have a shorter time span, investments with stability and guaranteed return are the probable choices for you.
Tip: The earlier you start, the better it is since the power of compounding helps in building your investment portfolio.
▪ Investment need
Once the financial goals are known, the primary reason for investment is evident. That helps in making investment decisions easily. This is because the amount of money needed for the specific goal and timelines would be specified, making it easier to plan.
Tip: Your needs have to be separated from wants. Once the investment need is known and penned, it becomes easier to plan and stick to it as well.
▪ Return expectations
Depending on your return expectation, you can choose the right investment avenue to meet your desired goal. Each investment has its associated risk and expected return and being an investor, you would know that there is a trade-off between risk and return, i.e. higher the expected return, higher would be the associated risk.
Tip: However, opting for high-risk investments might not be most desirable in your investment journey as the converse is not always true. So, investment is a game of choosing your risk and then achieving the return on investment and not the other way round!
▪ Investor knowledge and experience
An experienced investor usually takes faster and smoother investment decisions without too much time. Thus, an Investor’s experience plays a role in decision making. It’s also good to seek help of expert advisers to smart decisions.
Tip: It takes time for investors to gain investment experience which cannot be expedited under any circumstance. So, start slow, enjoy the investment experience before taking any drastic step!
There are lot more factors that goes into making investment decisions and it depends on your personal profile, family history, number of dependants, loans, etc. Considering the various factors while making investment decisions can help you build a solid investment portfolio that best suits your needs and temperament.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.