Before deciding 'where' to invest, it is important to ask 'for what' am I investing. Your stage of life, financial responsibilities, key goals in life and your risk profile are very important aspects to understand before you invest.
Your life stage will be key in determining the priority of financial goals/events that you need to plan for. For a young and single individual the most important need may be to buy his or her own house and save for higher education. Whereas for a married couple with children, saving an adequate amount for their children's education marriage etc. may be of higher priority. And for a person who has already retired, the primary need would be to live a comfortable life even after the regular income from profession/business has stopped.
Here are a few examples of important goals:
Single House, Higher Education etc.
Newly Married Car, Child's Birth etc.
Married with Kids Children's education, Bigger House, etc.
Pre Retirement Starting a Business, Family Vacation etc.
Retired Regular Income, Philanthropy etc.
Define Key Goals
So after you have provided for emergencies, it is now important that you define your key goals. At the cost of being repetitive, we'd like to stress the importance of creating S.M.A.R.T. Goals:
S.M.A.R.T. is a commonly used acronym for goal setting, the original source of this term is not unknown. In simple terms, the goal should state how much money do I want for what purpose and I should have it ready by what time.
Know Your Risk Profile
It is very important to first understand your own risk profile before you start investing. You need to check for risk attitude as well as tolerance.
Define Asset Allocation
Asset allocation decision is about dividing the investments between asset classes such as equities, cash and money markets equivalents, bonds, insurance, real estate, derivatives. Commodities, antiques and art, international financial instruments. The three main categories are Equity, Debt and Cash and deciding how much goes where depends on your goals, time horizon and risk taking capability. For instance, for a goal like retirement that is say 20-25 years away and with a risk bearing capacity of moderate you could allocate 55%-60% in Equity (the riskier option which earns well over the long term) with the remaining in fixed return instruments.
Invest and Manage Key Documents
Now is the key step of investing in avenues based on your goals, risk profile and desired asset allocation. It is equally important to maintain a systematic record of all investments and insurances, income tax returns, bank statements, so that you have a snapshot view of your net worth at any given point of time, your diversification into different assets and can take a better decision on re-balancing your investment portfolio as and when necessary.
Take Control of your Money
To ensure that your money works for you and not the other way around, you need to constantly monitor your investments to ascertain that they are headed in the right direction and that they are still in sync with your goals.