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Let’s get one thing straight; your long-term financial goals such as owning a house, paying the college fees for your kids, or a nice retirement nest egg can be realised only through safe and prudent financial investments. Most experts would advise you to start investing early.

Investing your hard earned money must be a carefully thought out process, and one needs to consider many things before they get down to it. Here are the seven critical things to consider before investing

#1 Safety

It's wiser to be safe rather than sorry. One of the most widely quoted wisdom of legendary investor Warren Buffett is: “Rule No. 1: Never lose money, Rule No. 2: Don't forget rule No. 1.” Safe investments may not mean zero risks investments. There will be temporary downsides and volatility which are part and parcel of Investment.

#2 Liquidity and its implication on return

Liquidity is basically how easily and quickly the underlying asset can be converted into cash without compromising the price. For example, you may not be able to liquidate your real estate quickly and in parts. If trying to sell for an emergency, you may be forced to sell at a substantial discount. It's advisable to create an emergency corpus before investing.

#3 Your Risk Profile

Risk and Reward (return) positively correlated. Higher return, demands higher risk. Lower risk generates a lesser profit. Who doesn't like higher return?. Question is; Are you ready to take the required risk? Even if you want, can you afford to take such risk? Even if you afford to take such risk can you emotionally overcome the pain of volatility and loss?

The risk profile is unique to every individual. The risk profile is optimal risk level, considering the asset class risk, your financial and emotional capacity to take the risk. Evaluating risk profile is an essential exercise that one needs to indulge in before constructing an investment portfolio and investing.

The trick is to find out the acceptable level of risk. For example, you might be able to pump 50 Lakhs in risky securities/bonds which may not affect your lifestyle or wealth in anymore, but if you were to lose just a few lakhs, you might lose your sleep and become restless.

Evaluating your risk profile is vital for many reasons. For one, it will help determine the asset allocation. Risk profile based investment keeps you away from fads and irrational decisions.

#4 Nature of Assets

A thorough study/investigation of the investment assets are in order if you wish to invest. Study the investment product and know what the risks are and the return variations and minimum time required to get expected return rate. Look at the historical data of the product to see how it has performed in the past and then take your call. Beware of free advice and product pushers/sales agents. You can get recommendations / second opinion from a financial planner.

#5 Real Return

Investment is all about the returns, never forget that. So when you are planning to invest in a product, always calculate the real returns that you are likely to get minus the cost, tax and inflation. 8% taxable FD and 8% Non-taxable return from mutual fund / govt.schemes are not same. Real Return will give you a clear picture of whether you want to invest in that product or not. Cost matters a lot, particularly when your investment horizon is more and expected returns are low. Look at Entry Cost, Recurring Cost and Exit Cost.

The high cost of entry and the recurring cost will severely impact your return. For the same scheme, there is a difference in recurring cost of the regular plan (Bought through an Agent) and direct plan.

#6 Expect the Unexpected

Nobody’s life is predictable. That’s why we need to invest in rainy days. That said, the adage of not putting all your eggs in one basket makes perfect financial sense. Invest the money that you wouldn’t immediately need and wouldn’t be tempted to tap in. Mostly this is bonus money that you might have spent on a ridiculously expensive mobile (that you do not need by any means), except that you are investing it. I might ask you to ‘invest and then forget about it’, but it would be wrong because one needs to keep an eye on their investments at all times. Always keep liquid cash in hand/current account that you could tap on so that you are not tempted to foreclose your investments.

#7 Asset Allocation

It's never wiser to put all your eggs in one basket. Spread out your investments based on your risk profile. Asset allocation gives your portfolio much-needed stability with lower volatility. Asset allocation effectively safeguards us from emotional investment decision and provides peace of mind.

If you consider all these seven things, you should be able to make some wise investment choices.