Investments, if done right, can help you grow your wealth and accomplish life goals. However, among the seemingly endless investment opportunities, how do you gauge the potential of an investment? While there are no thumb rules as such, here are certain pointers you can use as benchmarks to evaluate your investment potential.
Here is a checklist –
Risk-adjusted Returns:
This is perhaps the most critical metric on which investors evaluate their investment. The returns an investment offers given the level of risk associated with it. It enables you to compare high-risk and low-risk return investments.
By evaluating the risk-adjusted returns of an investment, you can judge if you are extracting the highest possible gains with minimal risk involved.
Sharpe ratio, alpha, beta, and standard deviation are some popular risk-adjusted returns metrics. On most occasions, investments offering high returns have higher risks associated with them.
Liquidity:
Liquidity refers to the ease with which you can convert your investments into cash. While investments in stocks and mutual funds are highly liquid, it’s not so for investments in real estate. Liquidity matters, especially in contingencies.
Therefore, while setting up an emergency fund, make sure to invest in liquid instruments. Returns should be the last thing in your mind when you park money for rainy days.
Regulations:
Well-regulated investments give you the route to seek action in case something goes wrong. Regulators like SEBI and IRDAI closely watch products and practices to ensure consumer protection and safety.
However, there are some financial instruments where there are little or no regulations. These are highly risky bets, with potential chances of suffering huge losses. Hence, it’s in your interest to ensure that your investments are well-defined with proper guidelines protecting your interest.
Tax Benefits and Convenience:
This is another crucial metric. The actual return from your investments is what you get after tax deduction. Hence, before investing, analyze its tax treatment. Tax treatment varies across asset classes.
Investing in instruments where taxes eat up a chunk of your gains adds little value to your portfolio.
Equally important is to factor in convenience. For example, while you can invest and gauge performance of your equity shares easily, the same can’t be said about real estate as it involves more documentation and legalities.
When it comes to making an investment, there is no room for guesswork. Always consult with an expert if you have any questions or concerns; they are your best resource when it comes to making smart choices.
(The author is President & Head, Personal Wealth, Wealth Management. Recommendations, suggestions, views and opinions are his own. These do not represent the views of Economic Times)
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