Before choosing the best investment options, you should research the Factors For Selecting Best Investment. What are those key Factors For Selecting Best Investment, All of you know the answer and it is-
Choose liquid, safe, high returns and tax-free investment
But, the difficult task is to identify investment with high return which is risk free and safe. We will discuss and try to explain it further which will create more clarity on this.
In this article, we’re going to dive deep answering the question “What are the key elements of a prudent investment?” Most of the time, people make a mistake financially, it’s because they did not adhere to the key elements of a prudent investment. I am going to give these to you in order and they actually spill an acronym.
Whenever I set aside serious cash, I don’t care if it’s in real estate or if it’s in insurance companies and different products or if it’s in the market, mutual funds, stocks, or what-have-you, I ask myself, “Does it pass the liquidity, safety, rate of return test? And what about the tax benefits on investment?”
Factors For Selecting Best Investment
Bellow are explained the factors for selecting best investment, which need to considered before making investments-
1. liquidity of Investment
So, the number one Factors For Selecting Best Investment is liquidity. The ability to access your money when you need it. When people need money the worst is the hardest to get sometimes.
When you invest in PPF, Tax Saving FD, ELSS etc., it’s not liquid investment due to the lock-in period. If you get into trouble and your equity is tied up in your real estate or your house when you need the money the worst is the hardest to get. It does not pass the liquidity test.
A lot of times people think liquidity is down the list. No, it’s the number 1 reason why people get into financial trouble. So, liquidity is number 1.
2. Safety Of Investment
Not only the safety of the institution but the safety of your principal. Whatever I set aside, I do not want to lose due to market volatility. And any year that I make money, I want that money made the previous year to be locked in, to become a new protected principal.
I don’t want to ever lose in future years the money I made in previous years. That’s called lock-in and reset. So, the safety of the institution, insurance companies, the entire insurance industry in my opinion is the safest repository for serious cash.
3. rate of return on Investment
Rate of return on Investments is the criteria to judge the profitability of investment options. A lot of people put this up Rate of return on top priority. The lowest rate of return should be equal to or greater than the inflation rate or the cost of the funds including opportunity cost. Tax benefits are icing on the cake. I prefer the tax-free. And I like to have my cake and eat it too.
So, I like all of the above but these are listed in order of importance. Many people consider it the most important factor for selecting best Investment When you do not do that, people get into trouble. So, let’s apply this laser test to different kinds of investment alternatives. Again, liquidity is number one. It’s the ability to access your money when you need it. And I would prefer tax-free, without penalties.
If we go to the safety of principle, you want to preserve what you set aside. And in any year you make money, you want that to become a newly protected principle. And the third strength is the rate of return. Earning a competitive rate of return that historically has beaten inflation.
4. Tax Free Investment
When it comes to tax deductions and exemptions, There are 3 points to consider for tax free investment-
- Tax deductions at the time of Investment made
- Tax exemption on Interest/Dividend
- Tax exemption at the time of withdrawal/redemption
Income tax deduction for the investment made is provided under section 80C of Income Tax Act, 1961. While there is an exemption for interest and dividend under section 10 of the income tax act.
Also, there are many exemption at the time of withdrawal/redemption for selected Investment Options.
Many fail the liquidity test. You can’t get your money quickly enough in an emergency when you need it. Now, if we add the safety test, how many of these will give you safety a principle where you do not lose your principle?
This many more do not pass the safety test. Let’s go to the rate of return test. You’ve got to earn a rate of return equal to or greater than the inflation rate or the cost of the funds. This many more fell the rate of return test.
There are multiple types of investment and one of them is mutual funds but not all mutual funds. Sometimes your money in the market is subject to volatility and it’s subject to taxes and so forth. That’s why only some mutual funds.
Money inside of these instruments generally in liquid unless you do not structure it correctly or if you lock it up into an annuity. It passes the liquidity, safety, and rate of return test with flying colors. But it’s the only one that allows me to accumulate my money totally tax-free.
Hope This article described all the factors for selecting best investment. If you have any query, ask in comments.