Investing - How, when, why?

Investments at time can be perplexing considering the number of investment avenues around and lack of proper unbiased guidance. So how should I plan my investments? Generally, though the answer to this question depends on one’s financial goals and current financial state, here is the list of most common investment avenues. I have divided them into primary, secondary and tertiary. The order of precedence is as it was in school viz primary are the first step, followed by secondary and finally tertiary.

Along with every investment vehicle, I have also mentioned the risk profile - Very low meaning then there is very little or negligible risk of losing the capital, whereas very high has high chance of loss of invested capital and is not meant to be for people who are putting their savings into the investment vehicle. Very high risk investments are only for those who have a specific investment goal and do not mind losing a part of their capital for achieving this capital. It is for ones who have high disposable incomes.

Primary

a. PPF - Public provident fund - It has a maximum limit of 1 lakh per year and it gives around 9 percent after tax return which is really good. I think it is the safest place to invest but the investment horizon has to be atleast 10 years. This is a must do for any savings plan.

Risk Profile – Very Low

Return – Medium but steady – Really high considering that there is minimum risk

Investment goal - Safe investment and steady income and retirement planning

Investment reason – Saving and being able to secure future and manage inflation

b. Debt funds - They are little less risky than equity funds though they generate decent returns - Approx 10% per annum. You have to invest in it for a specific period to avoid short term capital gains tax. This is again a low risk investment and returns are also decent.

Risk Profile – Low

Return – Medium

Investment goal - Safe investment and steady income and retirement planning

Investment reason – Saving and being able to secure future and manage inflation

c. Bank fixed deposits – They are not very lucrative if you are in high income bracket. The only advantage is that the invested sum is safe and there is little or almost zero chance of losing the invested capital. But this can be avoided if you are in high income brackets, as the returns on this are taxable and an effective tax rate of 30% makes them highly avoidable.

Risk Profile – Very Low

Return – Medium to Low depending on your tax bracket

Investment goal - Safe investment and steady income and retirement planning

Investment reason – Saving and being able to secure future and manage inflation

d. Government bonds – One can invest in various government bonds and bonds issued by issued by public companies. The ticket size can vary from a few thousands to a few lakhs. They are really good as they are risk free returns and give you returns a bit better than a FD

Risk Profile – Very Low

Return – Medium

Investment goal - Safe investment and steady income and retirement planning

Investment reason – Saving and being able to secure future and manage inflation

e. Insurance – One can look for a savings plan or a term assurance based on ones requirements. If you have invested in most of the above mentioned asset classes, then a term assurance makes more sense as it covers life risk and doesn’t give any return on investment. The benefit is that the life cover comes at a much lower premium. On the other hand, if one hasn’t invested much in the above plans, then one can look for a savings plan which gives benefits of both returns on investment as well as life cover.

Risk Profile –Low

Return – Medium

Investment goal – Safeguarding from mortality risk and getting a life cover

Investment reason – Not a lot of benefit in terms of ROI but mainly for life cover

Secondary

f. Gold – Most people invest in gold believing that gold prices always go up. But, I would say that if you have such a view, you are more likely to be given a rude shock. The reason for investing in gold should rather be the one which is derived from the traditional wisdom of our ancestors. Gold is a very liquid asset and is an investment meant to be liquidated during bad times. Hence, when you invest in gold, you should rather assume it as a consumption which may or may not give you returns but would definitely be a strong base to fall upon during bad times. I suggest it should be atleast 5% of your annual savings.

Risk Profile –Medium

Return – Fluctuating – Can be very high to negative – Long term average is medium to high

Investment goal – Protecting against major macro-economic risks and a physical asset which can be used during volatile times

Investment reason – Physical asset which has value despite depreciation of currency/ equity and is highly liquid

g. Company bonds – One can invest in various bonds and bonds issued by issued by corporate. Ensure that the credit rating of the bond is good and the company has a good track record. Don’t just look into the return on investment. The ticket size is generally high like a few lakh of rupees. They are really good as they are risk free returns and give you returns a bit better than a FD.

Risk Profile –Medium

Return – High and steady if the company is properly selected

Investment goal – Generating steady return on investments and having a fixed annual income

Investment reason – Generally debt is safer to invest than equity and hence should be a part of one’s profile for times which can be volatile.

h. Equity funds - These are mutual funds for equity schemes. These are high risk , high return places. You should not allocate more than 40% - 70% of your capital in these considering your risk profile. Also, most of your extra income should be put in this if you do not have a very strong dependency on that money and would not need it in case of emergencies. You should always do an SIP to invest here. Minimum investment period is 1 year to avoid capital gain tax but I suggest atleast 5 years vision. One should seek help of a qualified investment planner to identify the right places to invest as there are 100s of schemes and each one has a different risk profile and return on investment.

Risk Profile –Medium

Return – Medium to High in the long run

Investment goal – Allocating funds to achieve higher esteem goals like buying a house or making an expensive purchase which may or may not materialise

Investment reason – Gives a good return on investment but one should have the capacity to hold on to them during downturns too. Else, you will end up losing money here.

i. Infrastructure bonds - Besides the 1 lakh income tax exemption limits, there is another 20000 limit for these bonds where you can invest. Here the income invested is exempt of taxes upto 20k and is a good place to invest as the returns are more or less fixed around 8% after tax

Risk Profile –Low

Return – Medium

Investment goal – Tax exemption and decent return

Investment reason – Saving tax and investing

Tertiary

j. Real Estate

One should invest in these after having invested in the primary and secondary sources. The reason behind this being that the ticket size is huge and less liquidity during turbulent times. There is a growing sentiment that real estate prices keep rising. USA has already experienced a rude shock when the prices changed their direction and similar things can happen here so one should invest in this industry only if one has extra income and can hold onto the asset during turbulent times or has the capacity to absorb the risk.

Risk Profile –Medium

Return – Very High

Investment goal – Creating physical asset, Generating rental income, Using it as collateral or re-investments.

Investment reason – High return on investment, creating high returns and creating a physical asset

k. Stocks and shares

Over a period, one should try and pick up quality stocks for the long term at good prices. Few of the wealthiest people have done it so from the stock market. The ability to pick the right stocks by being able to devote quality time to research and understanding and doing fundamental analysis is a must before you venture into it.

Risk Profile –Medium

Return – High

Investment goal – Creating wealth, Retirement planning

Investment reason – High return on investment

l. Strategies on stock markets

There are various strategies on the stock markets floated by NBFCs which can generate very high return. The investor has to be however aware of the rationale of investment and the risks before investing in them. It is meant for people who have strong background into financial investments or who have proper investment guidance. Generally the ticket size is also large – Minimum of 20 Lakhs or so.

Risk Profile –High

Return – High

Investment goal – Wealth creation

Investment reason – High medium term returns after proper risk analysis and mitigation