Top tips on investing in financial products

Investing money in financial products is an effective way to accentuate wealth in the long-run, but given the risks associated with investments, it is imperative to plan it well at the inception in order to avoid hassles later.

Before you place your money in a financial product expecting it to yield high benefits, it is important to choose the right product by working out your financial objectives, assessing whether or not the product meets your needs, knowing how much money you can afford to put aside, and understanding the risks involved.

Below is a quick overview of some common financial instruments, and some useful tips to consider before investing in financial products:

Life Insurance Plans

Whether it’s participating endowment or whole life insurance policies, only part of the policy value is guaranteed, while the remaining non-guaranteed value depends on how the insurer’s participating fund performs. The fund values for investment-linked policies are also not guaranteed. These values are determined by the performance of the underlying funds, and vary across different types of funds. So before you starting investing in life insurance plans, it is important to read and understand the terms and conditions and figure out whether or not they suit your objectives.

Unit trusts and ETFs 

The value of unit trusts and ETFs (Exchange Traded Funds) may be affected by the economic and political factors in the region, sector, or country the fund invests in as well as the changes in exchange rates of the currency there. In addition, some of the products have complex structures that are not easy to understand if you are not aware of the financial jargon. In such cases, it is important to seek advice of a qualified financial adviser before investing.

Equity Investments

Investing in shares is tricky business as share prices are volatile and easily affected by systematic and non-systematic risks. It is better to avoid such investments if you do not understand the company’s business and the risks involved. If you are risk averse you might consider deposits and bonds as they are on the safer side.

Bonds

By investing in bonds you are effectively lending money to the issuer of the bond at a fixed interest rate for a given period, and you stand to receive the face value of the bond upon maturity. There are fewer risks in this form of investment when compared to investing in equity, but it’s not a 100% safe investment either.

There is a risk of credit default by the issuer, and the issuer’s falling credit quality can cause the bond price to fall – hence it is important to consider the credit quality of the issuer before investing in bonds. It is better to check and make sure the rating of the bond (given by credible rating agencies) is current and that the ratings trend for the issuer of the bonds is consistent. Bond prices are also subject to interest rate risk – if the interest rates increase, the bond price falls below its purchase price.

In any case, diversification of bond portfolio can help overcome the risks and counter the volatile factors discussed above. Also, there are various types of bonds, and by including the right bonds (as per your needs) in your portfolio, you can maximise returns and minimise the risks. If you are unsure or don’t want to spend time researching before investing in financial products, it’s always advisable to speak to a qualified financial adviser first.