Smart Investing for Smart People

The relationship between risks and returns is like that of roses and thorns. One is a treat to the eyes and the heart, while the other will leave you with cuts and pain if you’re not too careful. Risk and expected returns go hand in hand. High risks do not guarantee high returns. But as investors, we expect that our returns should also be high. So with higher risks, our expectations of a higher return also increase. We spend most of our lives trying to increase our bank balance and then subtracting and further dividing it for our expenses. But the real fun starts when we learn how to multiply our money. This is where different investment avenues help us out. Be it going all in with equity or playing it safe with money market instruments, trusting mutual funds or going with long term debentures, or going the conventional way and investing in gold, real estate and deposits path. Different investment options have diverse offerings. But are all investments equally efficient? Let’s find out.

 

 

Living on the edge with ‘Equity Investments’

Equity investments mean investing in a company’s shares. These are highly volatile investments. There is no guarantee of return and it carries high risks but also provides the best inflation-adjusted returns over a long period of time. The returns are usually high and compensate for the high risk taken by the investor. There are two ways to approach equity markets- by doing fundamental analysis or by doing technical analysis. Fundamental analysis is like preparing the entire syllabus in and out. Here we take our decisions after evaluating the qualitative data related to overall economic and industry conditions and the company’s financial performance and management. Whereas technical data is more like studying for the internal assessments where all we do is skim through a few important chapters. Here, we go through the stock charts to identify the trends and patterns that the stock values have shown over time and predict the future performance based on these trends. There is no minimum maturity period involved with equity. One can trade for long-term or even on a day-to-day basis.

Benefitting mutually from ‘Mutual Funds’

“Mutual funds sahi hai”- this is what they say. But is it so? There is a lot of conjecture revolving around the risk factor and the return expectations that are involved in mutual fund schemes. These are investment vehicles that pool in funds from several investors and then invest these funds into different options. While investing in mutual funds, we need to first carefully study the profile of the fund manager. Knowing where to move the money to maximise the returns requires expertise and experience. Knowing whether the person whom we have entrusted our money can be relied upon or not is crucial. Also, what if the said manager leaves the agency and our funds are allocated to some other manager? The reliability of the new manager comes under the scanner again. Next we need to check the expense ratio of the funds. Expense ratio includes brokerage and all other charges that the mutual fund company charges the investor. We need to ensure that the charges are feasible and the returns are high enough to make it up for them. Lastly, check how the option has fared in the past. Although do not just make a decision based on the past performance. It can only show us the trend and help us understand what can be expected from the option. But it is not a completely accurate prediction as in what may or may not happen in the future. Do some research today and follow this process. You will yourself understand that all the misconceptions that surround mutual funds are (no brownie points for guessing this) just myths.

The name is Bond(s). ‘Debentures and Bonds’

Debentures and bonds are long-term investments that provide fixed returns. Thus, they offer a steady flow of income over the years. A debenture is a long-term loan taken by a company from the public. It carries a fixed rate of interest and is repaid after a specified period of time. In the case of bonds, the risk factor depends upon who the issuer of the bond is. If one invests in a Government bond, then the risk associated is negligible. However, since the returns are fixed depending upon the interest rate on which they are issued, these securities do not offer protection against inflation. Also, these securities work well only if the surplus is too high and the primary focus is not wealth creation. Thus, it is advisable to look out for better options that can help in the growth of our money.

 

Chota Packet, Chota Dhamaka- ‘Money-market Instruments’

Imagine this. You wake up in the morning and make yourself a cup of coffee. As you are admiring the beautiful weather, your kid enters and drops a bomb. He says that he wants to study abroad and needs a hefty sum of money as the admission dates are closing soon. As happy are you with your child pursuing higher studies, you remember that majority of your savings are put into SIPs and other investments that are locked in. What to do now? To avoid all this, it is very necessary to have your financial goals managed properly and well in advance. Creating a portfolio that has an adequate mix of both short term and long term investments is vital. Treasury bills, commercial papers, certificates of deposits are a few money market instruments that are for very short periods, offer liquidity, and carry a moderate rate of return. However, care should be taken while investing in these securities.

The good-old ‘Real Estate’

It is said that the best investment on Earth is…well, Earth itself. The house that we live in, is it an investment? Emotionally, yes. But financially speaking, if the house is not generating any extra income, then no. Real estate investment involves the purchase of a property that can generate capital appreciation or rental income or both. An investment once made, usually offers high returns, but only after a very long period of time. Plus, if the property has been purchased on a loan, the cost of repayment can become a lingering financial burden over the years. If one does want to invest in real estate, they should do it through a reliable property manager. A good real estate manager presents a wide pool of options to choose from, takes care of any legal formalities involved, finds good tenants, tends to them, and ensures that the property is in good shape.

Depending on ‘Deposits and Small Savings Schemes’:

Bank and post office deposits are the most traditional and convenient form of investment. These are highly secure and liquid. The major drawbacks that these avenues suffer from is the low interest rates available and their inability to withstand inflation. Apart from these, several savings schemes initiated by the Government are also in huge demand. Schemes like the National Pension Scheme, Public Provident Fund, Senior Citizens’ Saving Scheme, EPF, NSC and NSS schemes are few worthy mentions. These carry several tax deductions on them, ensuring that a good proportion of the return stays with the investor. Although, these schemes come with certain rules attached. It is essential to have a proper understanding of the said scheme before investing.

Investment is ‘Gold’

Ever considered gold as an investment rather than an accessory? Be it Dhanteras or any other special occasion at home, the one thing that we Indians love to put our money into is Gold. And why not? It’s precious, it’s beautiful, and it’s pricey. Although physical gold as an investment might not be a good idea. Several deductions on making charges, purity concerns, and safety issues might make it a less viable investment. Not to forget, it can’t be liquified on a whim. It is much better to invest digitally or in paper form via Gold ETFs, gold Mutual Funds and Sovereign Gold Bonds. These are highly volatile, more liquid, and offer better security than physical gold. With the increasing value of gold, more and more people are opting it as an investment opportunity. It can offset the losses incurred due to inflation if held over considerably long periods of time.

Investment is the classic example of ‘As you sow, so shall you reap’. To reap better yields, we must sow our money in better avenues. As the investing mogul Warren Buffet said- “Investing is laying out money now to get more money back in the future.” How we treat our money today will define what our money treats us with on a certain tomorrow. Invest well today and certainly, that dream of watching your favorite soccer club play against their arch-rivals on their home turf, with the best of your friends from the best seats, will turn into a reality.

Team Investoday