What are the five most underrated cautions before investing? Many of us, as humans, buy or invest in products haphazardly, without conducting thorough research on the product’s suitability for ourselves. What precautions should you take before investing?
Let us talk about these topics in this post.
The Most Underrated Five Cautions Before Investing!!
# Simplicity
The most important factor to consider before making an investment is the product’s or asset’s simplicity. Again, simplicity is not universal. A product that appears simple to a finance professional may appear complex to a non-finance guy. Similarly, a simple product for a literate may appear overly complicated to an illiterate.
As a result, always look for YOUR definition of simplicity rather than others’. Albert Einstein once said, “If you can’t explain it to a six-year-old, you don’t understand it yourself,”. This should be your mantra before purchasing any asset or product.
I used to tell my clients “If you can’t understand any products or assets, the best financial asset for you is Fixed Deposits,”
# Universal Rules
Investing rules are straightforward and universal. However, as humans, we have a strong belief that if our investable surplus or asset is greater, we must employ a complex strategy. A simple strategy is for a small amount or for those with a small asset.
Don’t put your faith in me. Instead, examine the past; you will notice that investing principles are universal. However, the financial industry conditioned us to believe that if we have large assets or large sums of money to invest, we must use complicated strategies or products.
Remember, the more I complicate things for you, the more you will rely on me. Otherwise, why did you keep approaching me?
# Regulation
Before investing in any asset or product, consider whether it has been approved by Indian regulators. Otherwise, simply reject. Regardless of the return possibility or how fancy the product appears.
Ask yourself always like “If something went wrong, then whom to approach?”. Only proceed if the answer is clear. Otherwise, avoid such assets or products. Cryptos, Chit Funds (unregistered), and real estate projects are the best examples to demonstrate this point.
# Authority to sell
Check to see if the person is authorized to sell the product or service. However, this does not guarantee that the authorized entity will not mislead you about the product or service. Look for many companies, brokers, exchanges, distributors, or planners who may be registered, but few financial scams have occurred primarily through these individuals. As a result, verifying authority is only the first step. However, this does not guarantee that they will always sell you the best product or service for you.
# Liquidity
Liquidity is an important factor to consider before investing in any assets or products. Many people are motivated to invest in illiquid assets. However, keep in mind that life is full of surprises. We don’t know when we’ll need money right away.
As a result, always look for any asset or product’s liquidity issue. The riskiest strategy is to commit a large portion of your portfolio to such an illiquid asset over the long term.
# Conflict of interest
When someone offers you a product or service, thoroughly investigate the “conflict of interest” clause. The financial industry is riddled with vested interests. All of them are desperate for your money to be invested in their products or services. Always be suspicious when dealing with money, no matter who he or she is. Few may reveal, while few may not (upfront or due to regulatory obligations). As a result, it is your responsibility to double-check this.
Very useful article.
Some investors like complex products and banks/agents take advantage of it by selling Assured or Guaranteed return products to them, only to realize at later date that, there is nothing called as Guaranteed returns. I find these products very difficult to understand.
Also, liquidity is another parameter which is very important. If there is lock-in period which is more than 5 years, an investor should think multiple times before investing huge sum in such products. Hence investing in real estate should be the last option, as rental yields in India are negligible and also liquidity is very low.
Conflict of interest is the most important factor. When banks/agents are selling a specific product to you, it is always better to assume that, they will get handsome commission from it and one must double check before investing or better to avoid such products.
Dear Gunesh,
Thanks for airing your views.