I did a google search “meaning of investment” and this is the meaning as per the Dictionary – “the action or process of investing money for profit.” The word profit is the key-word here. All investment process is done to make a profit. Investments carry a substantial amount of known and unknown risk and on the basis of risk, the return is determined. So the investment which offers the highest return with the least possible risk should be termed as the best investment option.
Not all investments with the highest risks offer the highest amount of returns. Also, the risk appetite of investors differs. For someone who is in the ’20s would have more risk appetite than someone in their late 50’s. Age is one factor, few other factors would be income, fixed expenses, net worth, future income expectations, bread earners in the family, etc. You should choose the one which best suits your needs. It’s better to be a little conservative than to be very aggressive.
Best investment options in India –
In India, there are a lot of investment options available. Here we will discuss a few of them.
We won’t be discussing investing in your own business or starting a new business as they have their own pros and cons. So let’s discuss the actual financial instruments available for investment.
Equities (Stocks)
Investing in common equities is considered as one of the riskiest modes of investments. An equity investment is part of ownership in the company. This includes investing in IPO’s and already listed equity securities on stock exchanges. All you need to do is open a DEMAT and a trading account and you are all set to start your journey.
Equity investing generally starts with a top-down approach which is analyzing the economy, then the sector, and then a particular stock.
There are various ways to analyze equities. People can either learn to analyze equity or take the help of a financial advisor who is authorized by SEBI to give advisory.
How will you make money?
- Capital appreciation – You buy a particular stock for Rs 100 and sell it after say 3 years for Rs 300. You made a profit of Rs 200. Appreciation is not necessary, in equity investment the returns are not guaranteed. Rs 100 stock can also go down to Rs 10. Diversification is key to investing in equities.
- Dividends – By being an equity investor you also enjoy dividends as and when the company declares it.
Equity investing – Risk and Reward
- Risk: High to Very High
- Reward: Very High
- Skillset/ Knowledge: A lot of knowledge is required for one to start investing in stocks. One needs to be proficient to read financial statements when it comes to fundamentally analyze a company.
- Time Consumed and efforts required: Too much time-consuming.
Returns generated by NIFTY (a major Indian equity index) –
Fact – The world’s 3rd richest person as of now is Warren Buffet and he made all of his money by investing in common equities. He started investing when he was 13 years old. He’s worth over 80 billion USD.
If you find it challenging to invest in equities on your own, you can invest in equity mutual funds.
Mutual Funds
Mutual funds are specialized investment instruments that invest in an underline financial asset which would be equity, debt, or a mixture of both on your behalf. Think of these as a big financial company who are experts in investing and you can invest in as little as Rs 500 in these.
People who are not very comfortable investing in equities should opt for Mutual funds. These are managed by professional experts. There are various types of funds – Equity oriented, debt funds, index funds, funds that focus on a particular sector.
Generally, it is advisable to invest in an Index fund which is a passively managed fund. In this type of fund, the expense ratio (commission of the MF company) is very less.
There is an interesting way to invest in Mutual funds i.e. SIP. Every month on a particular date the MF company invests on your behalf in your selected fund, also the amount is predetermined by you. SIP stands for Systematic investment plans will cover this in detail in a later post.
How will you make money?
Buy low – sell high. Also, some funds have a dividend option where you are made a payout.
Mutual Fund investing – Risk and Reward
- Risk: High
- Reward: Moderate to High (depends on the type of fund)
- Skillset/ Knowledge: Less than equities. But you still need to figure out a good mutual fund. Investment gurus say, “Index funds” are the best funds.
- Time Consumed and efforts required: Less compared to equity.
Returns generated –
Different for different funds. It generally mimics the stock index.
Bank Fixed Deposits
Considered as one of the safest investment options. FD is safe as you get a fixed return on your investment.
It is safer than corporate fixed deposits. It is advisable to make an FD in a nationalized bank. Also, a lot of people invest in FD’s of multiple banks and not just one bank.
How will you make money?
FD’s offer a fixed return on your investment.
Investing in Bank FD – Risk and Reward
- Risk: Low
- Reward: Low
- Skillset/ Knowledge: Less.
- Time Consumed and efforts required: Very Less.
Returns generated –
Bank FD’s currently offer 5.5 to 7.25% (different for all banks). If you are a senior citizen the rate of return offered to you would be higher. Traditionally the interest rate was around 9% to 10% in 2010.
Gold
Indians have a craze for gold. And off lately it has given amazing returns. Last year in May the gold prices were around Rs 32,000 per 10 grams and the same now is Rs 46,000 for every 10 gms, giving a return of 39% in just one year!
For investment purposes, one should invest in Gold EFT or sovereign gold fund to avoid making charges on physical gold. This will avoid GST too!
How will you make money?
Buy low – sell high.
Investing in Gold – Risk and Reward
- Risk: Moderate
- Reward: Moderate to High
- Skillset/ Knowledge: Knowledge of when to buy and sell would be extremely helpful.
- Time Consumed and efforts required: Less.
Returns generated –
10 Years gold price in India – [chart source – goldprice.org]Only in the last one-year gold prices have given super normal returns.
Real Estate
Real estate is considered as an investment option by a lot of people in India. They invest in both commercial and residential real estate.
The capital requirement for real estate investment is too high and also is very risky.
How will you make money?
Rental income and also by buying a property for a low price and selling it at a premium.
Investing in Real Estate – Risk and Reward
- Risk: High
- Reward: Moderate
- Skillset/ Knowledge: Knowledge of the builder, locality, law, etc.
- Time Consumed and efforts required: Very high. A lot of paperwork and research is involved in real estate investing.
Returns generated –
There is no index which measures the returns real estate generates. Off lately Tire 2 and 3 towns have given the highest return. Also, some cities like Hyderabad have seen real estate prices appreciating recently. Here is an interesting article on RE investing.
Bonds
Bonds are fixed maturity instruments just like FD with an additional feature of trading. Just like equity you can buy and sell bonds in the exchanges. Bonds again are issue by 2 types of entities 1) Government 2) Private companies.
Govt bonds are considered the safest bonds. In India various govt institutions issue bonds, RBI is one of them. Bonds issued by RBI is considered as the safest bonds in India.
How will you make money?
Buy low and sell high (in case of trading bonds). Bonds offer fixed interest in terms of coupons. For example, RBI issues ABC bond in the year 2015 with maturity in 10 years. The issue price would be Rs 100 with a maturity value of Rs 100, with coupon payment of 10% per annum. This means you get paid coupon of Rs 10 every year for 9 years and in the 10th year, you get paid Rs 110 which is maturity value + coupon payment.
A lot of bonds are even zero-coupon bonds which are issued at discount say in the above example – RBI issues bonds at Rs 65 and in 10 years mature them at Rs 100 without making any annual cash flow.
Investing in Bonds – Risk and Reward
- Risk: Low for a bond issued by a financially sound company or institution.
- Reward: Low to moderate (It’s fixed)
- Skillset/ Knowledge: High.
- Time Consumed and efforts required: High.
Returns generated –
The returns are generally fixed. More institutions invest in bonds than individuals. Individuals generally invest in tax saving bonds.
National Saving Certificate (NSC)
National Savings Certificates, popularly known as NSC, is an Indian Government savings bond, primarily used for small savings and income tax saving investments in India. It is part of the postal savings system of India Post. [source – wikipedia]
You can find more details on this website.
Public provident fund (PPF)
Public Provident Fund (PPF) scheme is a popular long term investment option backed by the Government of India which offers safety with attractive interest rates and returns that are fully exempted from Tax.
The minimum investment amount is Rs 500 and the maximum is Rs 150,000. The tenure for this investment is 15 years.
The rate of return is determined by the GOI. Currently, it’s at 7.90%. This is one of the most popular tax saving schemes used by individuals. You can find more details here.
National Pension Scheme (NPS)
Pension plans provide financial security and stability during old age when people don’t have a regular source of income. The retirement plan ensures that people live with pride and without compromising on their standard of living during advancing years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement. You can find more details here.
Few important things to keep in mind
Keep your investment horizon longer. Think long term.
Diversify across asset classes and sectors when it comes to MF and common equity.
Consult an expert in case of doubt. It is advisable to consult fee-only financial planners or advisors. Your bank RM’s advise won’t be very efficient as she will sell you ULIP’s most of the time.
Insurance is not an investment. So it is advisable to not mix insurance and investment products like ULIPs. Pure term plans and medical plans are all you need for insurance. I will soon be writing a post on this as well. Stay subscribed to this blog for more information on this.
An efficient asset allocation would be a combination of multiple assets discussed above. For example for someone who is young and willing to take more risk
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Stocks (45%) + Mutaul Funds (25%) + Gold (10%) + Rest in Fixed Deposit and Gov bonds.
I think is can be an ideal asset allocation for someone who is below age of 40.
This is my allocation for my investments.
This looks like a decent allocation.
The allocation might differ from person to person.
A lot of factors would determine that.
Gold has given me great returns in the last few years. Real estate has given great returns in India.