Investment. Investment. Investment. For most working, and tax-paying professionals, this ten-letter word is no stranger. But many, often, are befuddled by the choices that this otherwise innocuous-sounding word offers to various people. While most products and advertisements offer quick returns in the short-term, others draw a rosy picture of a cushy, retired life. But reality bites. And sometimes it bites hard.
Each individual has his/her own set of finances at disposal. The appetite to take risks is also different in every individual. No two people have the same spending habit, largely thanks to the funds available. Then can it be expected that a similar investment will work for A and B both, and will reap similar dividends?
No, it can’t.
Sounds like a plan
Unlike Europe and America - where the state pitches in - there is no concept of social security in India. Hence the individual is entrusted with the responsibility of securing the future of oneself and that of the family. It, therefore, becomes imperative for the individual to invest judiciously, and in schemes that suit his/ her financial health, without denting the pocket. And this can happen when the individual has been able to map financial needs against available options.
Planning, therefore, is an integral part of any investment and tax-saving process, and needs to be done only after a detailed research and understanding of the available offers. A good investment happens when it can procure high returns and also help save some tax. More often than not, we tend to have a knee-jerk reaction to buy financial products in order to merely save some tax. It is pertinent to choose a product on its long-term advantages and the other merits that it provides. This can go a long way in providing financial guarantee to your family and optimise returns.
Appetite For Risk
But before one decides to park one’s money in any investment instrument, it is essential to gauge the individual’s risk profile. Often, people end up making the wrong investment choices because s/ he is not aware of the risk tolerance. The ability to take risks may be higher than the willingness to do so.
The factors that determine one’s risk- appetite include age (the younger you are, the higher propensity you have to stomach risks), income, dependants and liabilities. Also, the stability in your job or profession signals how much of a risk you can take while investing.
Now that your risk-appetite has been identified, where do you put your money? Here are a few options:
Equities: The big lure
The stock market has always had a strong pull over investors. The promise of making a quick buck has brought many to its circle. But making money in equities is not easy as it requires oodles of patience, perseverance and the ability to stomach the volatility that comes with it. Once you have that sorted in your head, then investing in equities becomes a fairly uncomplicated affair.
But before you go the equity way, remember these few truths:
1. No peer pressure, please! When it comes to stocks, shares, mutual funds and bonds, don’t be influenced by the actions of your social network. Do your own research before making a choice.
2. Don’t try to time the market: If you have invested in equity, don’t try to time the market in anticipation of high returns. Most financial advisors caution against timing the market as the bourses have a mind of their own. And almost nobody - as is historically proven - can second-guess their behaviour.
3. Patience pays: Patience has to be your middle name if you have entered the bourses. Make informed decisions in a systematic fashion and be patient for the rewards to show. Stressing about short- term dips and crashes won’t help you. You have to take both the Bulls and Bears in your stride.
4. Set realistic goals: Don’t create unrealistic and impossible targets when you are going down the equity path. A stock or MF which has generated 40% returns this year may not continue to yield the same the following year. Financial prudence demands that you map your equity goals to the existing market scenario.
The Gold Rush: to buy or not to buy?
Does investing in gold still make sense? Yes, because it works as a considerable hedge against inflation. Over a systematic period of time, the return on gold investment is in sync with the rate of inflation. Coupled with that is the fact that gold is negatively correlated to equity investments. So including gold - 5 to 10% of your total assets - in your portfolio will help you reduce the overall volatility of your portfolio.
The most common type of gold investment comes in the form of buying jewellery and bars and coins. However, with a heavy making charge - between 10 and 20% - this is not very cost-effective. Also, when you try to sell the same item back to the jeweller, he will buy it below market rates and deduct those charges from the total price of your item.
Jewellery and coins apart, there also exists the Gold Exchange Traded Fund known as Gold ETF. It is a type of mutual fund which, in turn, invests in gold and the units of this mutual fund scheme are listed on the bourses. Trading of Gold ETFs include brokerage fees (between 0.25% and 0.5%) and fund management charges.
Additionally, you can also park your money in Gold Mutual Funds which will invest in Gold ETFs on your behalf. Like any other MF, this allows Systematic Investment Planning. But this is a slightly expensive option as you end up paying annual management charges for the underlying Gold ETF.
Gold-based funds, however, are not meant for everybody. They are suitable for investors with high-risk appetite as they do contain a certain equity risk. Trading in the international market, they remain vulnerable to currency-risk.
Home Truths: is this the right time to buy a house?
Conventional financial wisdom has always been about securing a roof above one’s head. At most family discussions, elders have always driven home the benefit of having one’s own house.
Investment-wise, too, real estate has been one of the best-performing asset classes, with the potential to generate fabulous returns in the long term. The current realty slowdown has made some wary of its growth potential. But experts advise investors to make the most of the current scenario as it has now become a buyers’ market.
But before you take make that chunky down-payment or apply for a home loan, remember the following:
1. As end-users, you cannot be timing the market. Simply because for buyers looking for a home for personal use, there is no right or wrong time. But if you are planning to use realty for investment purpose only, then it’s pertinent to time your entry.
2. For all speculative investors having a short-term outlook, this may not be the ideal time to invest. However, medium-to- long term investors are more likely to see lucrative returns. Anyway, an investment horizon of 4-5 years is considered to be ideal for reaping dividends.
3. Comprehending capital appreciation is crucial when investing in realty. If one is planning to invest in property with a loan, it is advisable to benchmark the identified market’s performance in previous years.
4. Historical returns as seen in residential real estate assets have often outperformed other asset classes. Typical historical annual returns witnessed from residential real estate have been in the range of 15%-20%. With informed decision and investment done after proper due-diligence, residential real estate assets can still outperform many other asset classes.
NOW PAY FOR YOUR HOLIDAY THROUGH AN RD!
Got the travel itch? But no money? Don’t worry!
With the Thomas Cook Holiday Savings Account, all SBI customers can now pre-select a holiday and save for it through a recurring deposit. The offer is a top-up installment at the end of the period from Thomas Cook. Customers will be offered an inflation-proof holiday as they pay for a future holiday at today’s prices while earning interest on the linked e-Recurring Deposit.
UNDER 30? DON’T MAKE THESE MISTAKE
You are young and have a decent disposable income. You like to lead the good life. Online shopping, weekend pub-hopping, acquiring the latest gadgets and going on expensive vacations are your favourite pastime. If you want your life to continue in this party mode even after you stop working, you have to fix the following mistakes.
Skipping the SIP.
Not cool! A Systematic Investment Plan (SIP) is the easiest form of investing in a disciplined manner. From small sums to large chunks, you can park your money in SIPs. As the amounts get invested automatically at fixed intervals, the chances of continuing it are always higher. While creating your SIP portfolio, remember to decide the asset allocation. Consult with your financial advisor on splitting your SIP between large- cap, small/mid-cap and debt funds. Also don’t clutter your SIP portfolio, and try and stick to 3-5 schemes.
A delayed PPF account
If you still don’t have a Public Provident Fund account, get one now! Apart from claiming tax deduction under Section 80C, the interest income earned on this is tax- free. Additionally, the lump sum received at the end of the tenure is also tax-free. With an interest rate of 8.7%, a PPF account makes for judicious investment.
Changing jobs...withdrawing EPF
You have switched three jobs in the past four years. And every time you moved, you also decided to withdraw the money from the Employees’ Provident Fund to sponsor present needs. The next time you quit your job for a new one, don’t touch your EPF money. Instead, transfer it to your new employer’s fund. Your retirement corpus will grow.
Not investing in term insurance If you are a young, working professional and have dependent parents, term insurance is a must for you. For example, a cover of Rs 1crore for a 25-year-old is available for Rs 8,000-10,000 a year. Term plans provide pure protection at a very low price.
Skipping health insurance
The workplace today is a hectic and competitive one and stress is leading to health issues in many young professionals. We don’t want to alarm you - but a sudden hospitalisation can cause a dent to your savings. Don’t forget that medical inflation is soaring above general inflation. Specialised hospitals and advanced technology have led to a spike in health care costs. It is advisable to buy health insurance early in your professional life as you will end up paying a small sum as premium.
Investment can be an overwhelming affair for most. We often don’t ask our advisors or agents the right questions. The result: high costs (like agent’s commission, fund management fee etc.) which leads to losses. If you have a doubt, ask. Else you will repent for a long time to come.
Getting carried away by what the agent says
You may be working 16 hours a day. You may have outsourced all your investment decisions to your agent. One word of caution: don’t believe everything the agent says. Do some research of your own. Check with your friends and peers. Don’t blindly park your money in whatever the agent pitches as “tax-saver” to you.
SCAM: WHAT KIND OF AN INVESTOR ARE YOU?
Conservative: you play it safe, almost always. You don’t take risks because of erratic funds. A conservative player, you usually flit between bank FDs and post office schemes. And may park some 5-10% of your money in stocks to beat inflation.
Aggressive: you are a bundle of confidence. Equity is your sweet spot - the short-term losses don’t bother you. You are looking at the bigger picture, of course!
Moderate: you are the middle of the path. You can take a reasonable risk for a short period of time. But speculation is not your scene.