As an investor, everyone has a clear desire to attain sky-rocketed returns as quick as possible with minimum risk of losing money. An investor must understand that investment is not a casino, where you will hit the jackpot overnight.
Interestingly, there is no investment alternative which assure high return with low risk. In the practical world and its bitter reality, risk and return are directly proportional, i.e. higher the risk, higher are the returns and vice versa. However, it is very important to build a strong, sustainable and long term portfolio, which puts your excess corpus to earn for you. This leads to the base of investor profiling.
While opting for an investment avenue, one shall match his risk profile with the product. Understanding the self risk appetite shall be utmost priority. There are some investments which have potential to generate better inflation adjusted returns, compared to others but more often than not, they possess higher risk.
Also, an investor must understand that all investment products fall into two broader baskets- financial assets and non-financial assets. The former category comprises market linked products like stocks and mutual funds along with fixed income products like bank fixed deposits, public provident fund, whereas the latter one is more prominent in India, which includes physical investment in gold and real estate.
Equity as an asset class is gaining traction but it is not everyone’s cup of tea. It is probably the most volatile asset class with no guaranteed returns. Investment in equity is not just restricted to stock selection, but timing of entry and exit is very important. However, in the longer run, stock markets can be the best performing asset class with much superior alpha.
While putting your money into equity, investors shall opt for strict stop loss to curtail the extent of damage. It is advised to have an expert opinion and view before buying stocks. To put your hard earned money into direct equity, one needs to have a demat account.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. They can put their money into one or more kinds of securities. Mutual Funds can put their money into stocks, debt or both and even in gold. They can be actively managed or passive funds.
In active funds, the fund manager plays a vital role in choosing scrips to generate return, while passive funds or exchange traded funds (ETFs) invest the money based on the underlying benchmarked indices. Equity schemes are categorized according to market-capitalization or the sectors in which they invest.
Debt Mutual Funds are more suited for the investors who want steady returns with lower risks. They are less volatile as the corpus is put into fixed interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. However, debt mutual funds are neither risk free, nor they assure returns.
Bonds or Debentures
Debentures or bonds are long-term investment options with a fixed stream of cash flows depending on the quoted rate of interest. They are considered relatively less risky. An amount of risk involved in debentures or bonds is dependent upon who the issuer is. They include Government securities, savings bonds, public sector unit bonds etc.
Bank Fixed Deposits (FDs)
FD in banks is considered as one of the safest and traditional choices of investing in the nation. It is different from deposits in savings accounts. They provide a fixed rate of interest on the principal amount over a predetermined duration. Bank FD provides a higher rate of interest than savings accounts. However, The interest rate earned is added to one’s income and is taxed as per one’s income slab.
Public Provident Fund (PPF)
The Public Provident Fund is one the popular investment products, with a longer maturity tenure of 15 years. The impact of compounding of tax-free interest is hefty, especially in the later years. It is a safe investment as the interest earned (reviewed every quarter by the government) and the principal invested is backed by sovereign guarantee.
National Pension System (NPS)
The National Pension System is a long term retirement – focused investment product managed by the Pension Fund Regulatory and Development Authority (PFRDA). It is a mix of equity, fixed deposits, corporate bonds, liquid funds and government funds, among others.
Buying property is one of the most popular investment alternatives in the country. However, a property for self consumption should never be considered as an investment. Investment in real estate is not just limited to housing as the segments like office, commercial real estate, warehousing, student housing, data centers, shared spaces is also gaining traction amongst the investors.
Location of the property is the most important factor that affects the price of the property and rental income that is likely to be earned. Investments in real estate deliver returns in two ways- capital appreciation and rentals. However, unlike other asset classes, real estate is highly illiquid.
It is the most traditional form of investment amongst Indians, but possessing gold in the form of jewelry has concerns related to safety and high cost in the form of ‘making charges’. However, buying gold coins or biscuits is still an option but gold ETF could be ranked as a more viable one. Investment in gold papers via ETFs is more safe and cost effective.
Despite being a liquid asset class, many novice investors are cheated with ‘duplicate’ or ‘mixed’ jewelry, if purchased without proper knowledge or from a dubious jeweler.
Insurance plans sold as life insurance shall not be considered as investment options as they provide risk coverage in case of any mishap. However, many Indians consider insurance as an investment. Life insurance is an instrument for the security of life. The main objective of other investment avenues is to earn a return but the primary objective of life insurance is to secure our families against unfortunate events.
Investment is made with the objective of wealth creation and all above mentioned instruments fulfil their objectives, in accordance to the risk associated with it. An investor must understand the his risk appetite, time horizon and tax treatment on different investment avenues to make a judicious and sagacious investment call.