Impact investing is just like any kind of investing and as such, one needs to take a lot of precaution before they put their money into it. There are several factors that you will need to consider so that you don’t end up with a project that holds your money for too long while giving you next to zero return. Also, you need to consider an investment that will start giving you back your money as soon as possible. Seasoned impact investors like Bo Parfet have mastered the art of impact investment and that is why they are so successful in it.
These are some of the factors that you should consider when you are impact investing.
Risk vs reward
All kinds of investments usually involve some level of risk and impact investing is not exempted. Despite of that, what is most important is that you take calculated risks and always stick to a certain risk/reward ratio that works for you. A risk/reward ratio is a ratio that compares the amount of risk involved in investing in a certain venture and the amount of reward that one can expect to reap in return.
The risk/reward ratio can be calculated easily by considering the amount of loss that is likely to be experienced if price moves in the unexpected direction and the amount of profit that one can expect to reap if price moves in the expected direction. There are several models that one can base upon to calculate the risk/reward ratio. In fact, various industries have predefined risk/reward ratios. As such, it is prudent to do some research and ensure that you have a good understanding of the risks and rewards involved in the sector you want to invest in.
This is kind of self-explanatory but it is important to look at it anyway. You should choose an investment based on the amount of investment capital needed. For instance, if someone has 100, 000 dollars, they have a different range of investments they can invest in than someone who has 10, 000 dollars. However, this should not mean that your options are limited severely if you don’t have a lot of spare cash. Some people choose to take loans or mortgages to fund their investments. In fact, taking out mortgages on properties in order to fund investments is rather a very common way that is used by very many people since the vast majority of people usually cannot afford to invest in properties with their own money.
However, if you are considering to do impact investment, taking out a mortgage may not be the most ideal route to take.
Trading and investing are closely related terms with the main difference being in the time horizon involved in each of them. Trading usually involves money being exchanged fast while investing takes a longer time horizon. As an investor, it is important to choose investments based on how long it will start producing acceptable level of return. Impact investment is not one of those investments you can expect to yield fruits within a short period of time. You will have to be patient in order to get back your investment.