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For some individuals, putting money to work may not seem challenging in the past because they continued following familiar routines ---- putting money in deposit accounts or even investing in unit trusts based on other peoples opinion rather than studying the investment details themselves. A sales representative providing incomplete advice may also give the impression there is not much risk to worry about. Your limited knowledge, or maybe the sales representative too, may mean deciding on an investment that does not really suit your objectives, time horizon, and acceptable risk level.
Investing can be an uncomplicated process if you first assess your needs and investment objectives and then consider how comfortable you are with the financial instruments or securities you wish to put that money in. See what sort of returns can be expected, and in what form. Look at their risk levels. See if they all suit you. If unsure, study those investment choices a little further.
If you are interested in investing in unit trusts, do consult the prospectus before making your decision. It provides vital information on the fund, describes the investment objectives, the funds policy, how the fund manager will be investing your money, what kinds of returns are generated, and lastly whether the funds objectives matches your own goals.
Assessing Yourself
Setting Investment Objectives
Defining your investment objectives before you actually begin investing will help you determine your own requirements regarding investing. How would the returns generated from investment be spent, or when? When such things are clear, you will have a better idea what sort of investments you should be looking for.
Getting to Know Yourself
- Before starting, you should have some idea what your long term investment is intended for, such as whether it is for a childs education or to cover expenses during retirement.
- How much risk can you take on ?
- The expenses or spending that is expected in the future, and the amount that could be put into investments.
- Investment time horizon
- Most vital is to select the type of investment which suits you. For example, if you cannot afford to make losses on the principal amount you invested, you may wish to stay clear of equity investments or limit it to just a small portion.
Are you clear on the difference between Cash Deposits and Investing
Savings, such as Cash Deposits, are ways to accumulate wealth over the long term by adding to it bit by bit as time goes by. This pays for the regular expenses or for emergency spending. Most savings are through bank deposits (guaranteed by the state), but tend to generate low returns and may even fall short of inflation levels at times. On the other hand, investments puts your money into assets which can produce superior returns to that of ordinary bank savings. You may divert some of those savings into investments in government bonds or various securities to enhance overall returns, exceeding the returns achievable from savings alone. Of course, this takes on additional risks.
How much of these saving should be diverted to investments will depend on the amount of risk an individual is willing to take.
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Comparison Table Showing the Difference Between Savings and Investments
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Savings |
Investments |
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| Purpose |
Meets short-term needs or for unforeseen urgent spending
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Increases wealth over the long term |
| Methodology |
Bank deposits |
Bonds, equities, unit trusts |
| Risk |
No risks (provided the government continues to ensure principal and interest is secure)
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Risk varies depending on type of investment and securities selected |
| Source of Returns |
Interest income |
Interest income, dividends, and/or capital gains or losses from the investment
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| Strength |
Secure and very liquid |
Earn higher returns over the long term exceeding inflation levels
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| Weakness |
Returns generated from interest income is low
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Possibility of loss from investment |
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It should be emphasized that investments contain a characteristic where the potential for higher returns is generally accompanied by greater volatility. The financial term for this volatility or the variation in expected return, is called risk.
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