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The right approach to investing

Don't start with a financial product but with understanding your needs

The right approach to investing

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There are many avenues of investing. The most popular ones are property, gold, bank deposits, stocks, and mutual funds. Within each, there's an absolute jungle of options. That's why many investors struggle when it comes to choosing an appropriate investment - time is short and the choices many. The obvious outcome is that the most persuasive salesperson we meet ends up becoming the de facto decision-maker of our financial lives. Financial decisions get reduced to product choices, which become dependent on which product is worth someone else's while to pitch to us.

It appears that the solution to this would be to learn to choose the right financial products ourselves. That's obvious but wrong. The reason is that if you start believing product choice to be the most important thing, then you've already lost the battle. It's true that the entire visible machinery of investing is organised around financial products. Even the government's regulatory machinery is organised around products. And yet, this approach to investing is absolutely wrong - not just wrong, but disastrous.

The starting point to figuring out your savings and investments is not gathering information about the products on offer, but gaining knowledge about yourself. Why do you need to save? What will you do with the money? When will you need it? Are you sure of the amount you will need? What if it's a little less?

A surprising number of people have never sat down and thought about these questions. While it may sound like you will need to foresee the future, this isn't in fact the case. Most of us have precise needs that we can predict - specific financial goals which we need to meet at specific times. The way to escape from the jungle of financial products is to start learning about oneself - more specifically, understanding the predictable financial goals of our lives.

Here's why. If you want to meet specific financial goals, then each will need to be addressed with something that has a different time frame, risk and return level. For example, you may need money for your daughter's higher education after six years. Or maybe you want to buy a house in no more than 10 years and go on a vacation to Europe after two years. Further, you may want Rs 5 lakh to always be available for emergencies.

Each of these goals is very precise. The risk you can afford to take on as well as the amount of money needed can be quantified quite precisely. Therefore, it is relatively easy to figure out what kind of financial products can help you fulfil them.

The key thing to understand here is that you, as a person, do not need a single pool of savings. Instead, you have a range of financial needs and goals, each with different requirements. First identify these, and only then narrow down on the right investments.