20 Jul Due Diligence Questions to Ask Before You Invest

Investing mistakes can be an expensive affair. The simple solution to this problem is doing your due diligence. Investment due diligence is the first step towards investment risk management and to keeping your hard-earned money safe.

Here are some investment questions that you need to ask yourself before investing into any financial vehicles.

Question: Are there any ways in which this investment could result in a loss?

Answer: This is probably the most important question for investment due diligence. Thoroughly analyze the investment to check for any loopholes by which you can incur a loss.

What are the risks associated with this investment? Is there any way to manage these risks?

The kind of risks you are likely to come across are:

1. Company specific risk: Dig up the dirt on companies to understand where you are investing. Diversifying into multiple companies and industries is the best way to tackle this. Opt for mutual funds and exchange traded funds (ETF) to simplify investing in multiple companies.
2. Industry specific risk: Some industries may experience a dip due to various reasons like a change in labor law, technology upgrades, changes in consumer trends, etc. Again, do not stick to a specific industry while investing.
3. Investment style risk: Every investor has a style so you can be value v/s growth or large cap v/s micro cap. In either case, the market flux will reward or punish you so have a mix.
4. Market risk: This can be managed with hedging or diversification into non-correlated markets.

Question: Should I plan an exit strategy?

Answer: While you may think that you are going to stick with your current investment because it’s great going, always plan an exit. This is because no investment functions well forever.

A change in market conditions, your portfolio performance, your personal goals and objectives. When you plan your investments, always focus on what made you buy it in the first place, if the conditions change you need to go ahead with your sell decision.

Regularly pruning your portfolio can help keep it healthy and make room for the new.

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