Site Loader
Spread the love

INVESTMENT AVENUES

     What types of investments one should have?

     When it comes to investments, the first question to ask is “what is your age?”  The answer is pretty straight.  The next quest would be “What is your risk appetite?”  Now that’s when people start thinking.  It isn’t easy.  The two powerful R’s in investments are Risk and Return.  In simple words what is risk?  Risk is the money you are ready to part now, in expectation of future benefits.  However, there is a probability that the portion of money set for investment may not bring the benefit within expected time or it could be lost if invested in wrong places.  So, it is important to calculate the risk of different investment options along with personal goals and diversify it accordingly.  Here are some of the options available easily:

  • Public Provident Fund (PPF): This is popular investment avenue in India as it is considered safe.  However it comes with rules attached. 
  • It offers tax benefit under Section 80C of Income Tax Act.  Interest earned until maturity are also exempt from tax (yes its taxfree).
  • It has a lock-in period of 15 years, which means there is no liquidity.
  • Post maturity of 15 years, it can be extended in blocks of five years for any number of times.
  • Interest paid on PPF is reviewed by Government frequently. July-Sept 2019 rate of interest is 7.9% compounded annually.
  • Some loans are issues with PPF balance as guarantee. 
  • Bank Fixed Deposits (FD): This is most misunderstood investment avenue is what I feel.  We lock our funds and get minimal interest paid on which we pay tax as well. 
  •  FD range from 7 days to 10 years or more. One can choose any time range as per individual choice.  Interest rate varies according to tenure.
  • FDs offer premature withdrawal options but with penalty.   This should be checked with specific banks while opening account.
  • FDs are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) rules, only up to Rs 1 lakh (principal plus interest) is insured per person per bank.
  • Interest rates vary from 5% to 7% for tenures 1 to 10 Yrs. Senior Citizens get extra 0.5%
  • Bank FDs offer cumulative and non-cumulative options. In the cumulative option, the interest is re-invested and payable on maturity whereas, in the non-cumulative option, interest is payable periodically (monthly, quarterly or annually depending on the bank).
  • Interest is added to your income and taxed as per your income tax slabs. Interest is subject to tax deducted at source (TDS)

  • Real Estate: This is another popular investment.  There is two way of seeing this.  If one is buying the first house in which he/she wants to stay then it has to be bought in the beginning of one’s career (assuming it is bought availing home loan).  In this manner it is easy to absorb the EMI (equated monthly installments) as there are many years of working until retirement.  If the same is done 15 years later then the EMI will be a burden.  Having said this let’s check the following:
  • Home Loan is a long goal with repayment of loan ranging from 15 to 20 years. 
  • Rental income of home is around 2-3% and interest on EMI is between 8-9%.  This is not a great investment if one is looking for income from rent.
  • This investment is very illiquid i.e. buying/selling is time consuming.  Cash flows are not immediate.
  • Capital appreciation on home is not always positive.  Many people hold on to home assuming it will give a great appreciation.  However, if you consider inflation rate it may not be very impressive.  Also, the capital gains (profit from sale of property) have to be dealt in specific manner as per Income Tax Act.  Details are case specific, a Chartered Accountant could help you.

  •  Gold: One can buy gold in various forms- physical, paper or digital.   Physical form is jewels, paper form is gold bonds and digital form is gold ETF (explained in point 6).
  • Gold bought for personal use is individual choice.  However gold bought for investments could be in any of the above mentioned forms.
  • Gold is often used to offset the risk associated with other investment options.  For example when equity, bond or real estate are in downward trend gold acts as a hedge.  In short the value of gold is same globally.  Therefore it is sometimes used to offset the risks associated with equity or bond markets.
  • Gold has not given the best return considering tenure of 20 years or more.  It is recommended to have a limited investments exposure in gold.
  • Mutual Funds: There are several types of Mutual Funds.  Equity Mutual Funds, Debt Mutual Funds and Balanced Funds. 
  •  Equity mutual funds are those schemes that invest at least 65% of the corpus in stocks of Indian companies.  These are volatile as most part of the investment is in equity stocks which are subject to market risks.
  • Debt mutual funds are considered less volatile as compared to equity; however interest rate risk always exists.  Most of these funds invest in debt funds like government securities, corporate bonds, treasury bills etc.
  • Balanced funds are having a balance mix of equity and debt.  This to some extent cuts the volatility and balances the return as well.
  • Most of these funds are managed professionally by fund houses.  There are policies and documents where one can see the profile of fund managers and where the funds are invested.
  • For a long term investor the most suitable investment would be in equity mutual funds.  For investments above 5 years equity is the only area where there is maximum return.
  • For those who have no expertise in stock markets or for those who do not have time to analyze the markets and invest periodically the best way to invest in equity is through mutual funds.
  • Exchange Traded Funds (ETF): ETFs are many in number.  However, the preferred investment is in Index ETFs.  These are just like mutual funds but the returns are based on performance of an index.  For example: Nifty Bees are ETFs where the return on investment is based on performance of Nifty50 index.  Similarly Gold Bees are investments where return is as per price movement on Gold.
  • ETFs are cost efficient.  Mutual funds are embedded with cost which we do not see in our statements.  Most of the funds charge 2.5 to 3% on your investments to manage your funds.  However, in ETFs the cost is minimal, as little as 0.5% or less. 
  • ETFs are managed digitally and most of them can be invested through DMAT account.  There is no need to deposit a cheque or fill a form or visit a branch.  It is easily manageable.
  • All investment details are available online.  There is more transparency and less risk.
  • With ease of management this is the most liquid investment option just like Equity.  In case of emergency one can withdraw cash within minutes.
  • Index funds like Nifty Bees have given a return of 15 % to 20% in past 3 years which are far superior than fixed deposits. Gold ETF has given returns of 9% to 10% in past 3 years. 
  • Direct Equity: Investors who understand stock markets and are willing to take risks on their own can directly invest in Equity stocks of several listed companies and create their own portfolio.
  • Direct equity investments are considered risky as they are subject to price fluctuation on stocks (volatility).  This could lead to capital loss in case the stock picks are not efficient.  One needs to give time to learn and understand how stock market works, before investing hard earned money.
  • Market knowledge is a must as tips can be costly mistake. 
  • There are domestic and global market conditions influencing the stock prices.  One needs to be diligent and disciplined while investing in equity directly.  If this is difficult to manage then one can choose to invest through mutual funds.
  • This is one of the BEST investments one could make in a long run.  No other investment beats inflation like equity does.  Rs. 100 , 10 years ago is not the same as Rs. 100 today.  Today we get far less items with the same amount.  This is the effect of inflation. 
  • Some stocks have given more than 100% return in the past 5 to 10 years. It takes a lot of patience and practice to get such returns but for those who put in efforts it’s an ocean of opportunities.
  • WEALTH is created only by investing in equities over a long period of time which is over 10+ years.  
  • Bonds: Investors can choose to invest in bonds issued by government of India.
  • The government issues several bonds with different interest rates and maturity periodically.
  • Bonds can be issued in material or dematerialized form.  Material form is when a certificate of holding is issued as a proof of investment with all the details.  Dematerialized form is digital and amount is sent to account directly. Alternatively can invest in bond ETF.
  • Return on bonds is limited.  If the investment in made in 7 years 8% bond then the return is only 8% and not more. 
  • This is considered less risk as compared to equity, however there is interest rate risk associated. 

Most of the above can be chosen to create a balanced investment portfolio.  Younger you are higher should be the risk taking ability and Older you are lower should be the risk in investments.  General rule is to invest 100-X (X here is your age) into equity.  Example: If you are 30 years of age, then 70% (100-30=70) should be the investment exposure in equity.  Happy Investing !!!

Disclaimer: All the above is very time sensitive (Interest rate, tax rate, holding period etc).  There could be changes in tax rules or any other information above.  It is advised to do your own analysis before investing.


Spread the love

Post Author: rashmi

23 Replies to “INVESTMENT AVENUES”

  1. Way cool! Some extremely valid points! I appreciate you writing this article plus the rest of the site is also really good. Erna Mozes Orrin

  2. Everything is very open with a precise explanation of the issues. It was definitely informative. Your site is very useful. Thanks for sharing! Camel Puff Ulrich

  3. Hey! This is my first visit to your blog! We are a team of volunteers and starting a new project in a community in the same niche. Your blog provided us valuable information to work on. You have done a extraordinary job! Idalia Francisco Lachlan

  4. I do love the manner in which you have framed this particular problem and it does indeed provide us a lot of fodder for consideration. Nevertheless, through just what I have witnessed, I basically hope as the actual responses pack on that people today remain on issue and not embark upon a tirade regarding some other news of the day. Anyway, thank you for this fantastic piece and although I do not go along with the idea in totality, I respect the point of view. Pepi Bartram Lodmilla

  5. Thanks for the auspicious writeup. It actually used to be a leisure account it. Look complicated to far introduced agreeable from you! By the way, how could we keep in touch? Hildegarde Nikos Sven

  6. Normally I do not read article on blogs, but I wish to say that this write-up very compelled me to take a look at and do it! Your writing taste has been surprised me. Thank you, very great post. Emma Alick Levitan

  7. I was excited to uncover this page. I need to to thank you for ones time just for this wonderful read!! I definitely appreciated every bit of it and i also have you book marked to check out new things in your site. Rubina Kerk Sedgewinn

  8. Thanks on your marvelous posting! I genuinely enjoyed reading it, you might be a great author. I will ensure that I bookmark your blog and may come back later on. I want to encourage you to ultimately continue your great job, have a nice evening! Tedi Casey Procora

  9. Hello to all, how is all, I think every one is getting more from this web page, and your views are pleasant designed for new viewers.| Nada Portie Cassy

  10. I as well as my buddies were found to be analyzing the good ideas found on the website and so quickly I got a terrible feeling I had not expressed respect to the web blog owner for those tips. Most of the boys came absolutely glad to read all of them and have in effect honestly been loving those things. Thank you for indeed being very helpful and then for deciding upon some superb themes millions of individuals are really wanting to be aware of. My personal sincere apologies for not expressing gratitude to you earlier. Janette Mischa Diarmuid

  11. After looking over a number of the blog posts on your web site, I honestly appreciate your way of blogging. I book-marked it to my bookmark website list and will be checking back in the near future. Take a look at my website too and let me know how you feel. Marilyn Ingelbert Kameko

  12. Hey there, You have done an incredible job. I will definitely digg it and personally recommend to my friends. I am confident they will be benefited from this site. Nessie Tyrone Iverson

  13. Greetings from Ohio! I’m bored at work so I decided to check out your website on my iphone during lunch break.
    I really like the info you provide here and can’t wait to
    take a look when I get home. I’m surprised at how fast your blog loaded on my mobile ..
    I’m not even using WIFI, just 3G .. Anyhow, superb site!vista clear reviews

Leave a Reply

Your email address will not be published. Required fields are marked *