Thank you for visiting this third part of greatlysimplifyinginvestment series. If you are not yet convinced about investing, check out the first part here. If you are wondering what to consider before giving your money to anyone, you should read the second part here.
In this part let’s look at some of the options to invest. Most of these are known to you, so the job of simplifying is getting a little tougher. For each of the asset class, I have attempted to give some specific tips that you need to keep in mind and I have also tried to evaluate them against the holy trinity of investments – Risk, Return and Liquidity. The shades of color would be different to give you a relative perspective.
While technically there are various types of investment asset classes, to start with basics, below are the major categories of investment, of course leaving aside keeping cash at home and letting it languish in your bank account.
This is one of the simplest forms of investment class that most of you are aware of. This asset class typically comes with low return and low risk. The liquidity of the instrument may vary, but by and large you can take it as it is in safe hands.
The most common form of investment, but people tend to miss the fine prints to maximize the opportunity. While your banker may provide a great convenience in opening a deposit, look around for the better opportunities. If you have received a bonus, till you decide on further use of it, put it in a Fixed/Term deposit so that you get a return more than the savings account. If you do not have a bulk amount, it is good to start a Recurring deposit for any amount that you are comfortable with. This means you pay a certain amount towards investment for a certain period and after the tenor, you’ll really feel nice to see the bulk amount lying in your account.
While banks are traditional places where you will be able to invest in FD, there are quite a lot of corporates that take deposit and provide much higher rate of return. This is not usually offered through your banker and hence may be difficult to identify at times. Given the higher rate of interest these are more attractive than the bank deposits. The risk is that if the company winds up, it may be difficult to get the money back.
Corporate Non-Convertible Debentures (NCDs):
These are simple instruments that give you returns higher than the deposits. These are somewhere in between corporate deposits and shares. These are issued by Corporates for a fixed tenor and a fixed coupon (interest rate). The advantage is that you can sell these instruments in the secondary market when you need funds. Usually it is better to wait till the end of the tenor.
These are investments in companies and the returns are dependent on the performance of the company. There are quite a lot of rumor/whatsapp based trading that is happening and there are people advising without any technical knowledge. Please ensure you go through your banker’s investment advisor or through a trusted advisor before investing your hard earned money in these.
In simple terms when you buy an equity share, you buy partial ownership in the company. Yes, when you own shares of Reliance, you are also a partial owner. Now don’t start dreaming, yet! Essentially as a partial owner you accept the risk that the business is taking and make money out of it. Usually the price at which the shares are traded are way higher than the intrinsic value (book value). This is essentially because the free market assigns the share price based on future potential earning opportunity of the company. This is the reason the price fluctuates; this doesn’t mean the company swings between profit and loss through the day! These companies pay a share of their profit to you as a dividend.
Mutual funds are similar to shares; it is just that a professional fund manager will manage your money along with million other investors’. They usually buy shares of a basket of companies after a thorough professional research. Basically this will allow you to enjoy the benefits of Equity shares but technically you are not the owner, the mutual fund company is. These can be bought and sold as per your wish. The mutual fund companies have various funds that invest money according to a pre-declared theme. For eg., real estate funds invest in companies involved in real estate industry. So, basically know your fund before investing. There are thousands are active funds, so you need to take your advisor’s view before choosing one that is suitable to your needs.
One variant of this product is Debt Fund, where the company invests in fixed income instruments (explained above) on your behalf. Needless to say this delivers lower returns than the equity mutual funds.
I am clustering some of the tangible investment areas under this category. One important aspect is that this category has some amount of sentimental angle to it and hence it is always important to weigh it from both the angles. Let’s look at them from the investment angle here.
This has been considered a very lucrative investment avenue and time and again we come across some body whose grand dad bought a piece of land at dirt cheap price and the same is worth millions now. This is true in all investment avenues as long as you hold for a long term. This can be in the form of land, commercial property or residential property. Apart from the investment angle, you need to consider the legalities involved in the asset and ensure you buy a clear property which doesn’t have any entanglements. While buying a house is a complex decision, I’ll delve deeper in a separate post to show calculations that will help you to assess it well, let me share my brief views about the categories of real estate here:
- Land – Unless you are expected to stay in the vicinity of the property, this may be quite risky. Also there is no way to assess the growth opportunity. If you have a clear plan to construct a house for yourself or if you have a certain disposable income to park it in this asset, you could go for this, else we should leave this asset to the real estate promoters.
- Residential House – This provides benefit of a home and quite a lot of sentimental values. I feel it is good to purchase one house to enjoy a sense of achievement and satisfy the sentimental needs of the entire family. However, do the math about what you can expect before committing to this. If the purchase decision is with an expectation that it will double in the next 3 years, you could be in for a rude shock!
- Commercial Property – This is a very interesting investment opportunity, but will require a well informed and trustworthy advisor and/or a thorough knowledge of the local conditions and network. Unless you are very confident on these grounds, it’s better to stay away.
Thanks to the ‘Aurophilic’ culture in India, we are all used to the notion of hoarding gold at every given opportunity. Akshaya Tritiya has given us another reason to give a tinge of auspiciousness to this. I do not have the expertise to comment about the auspiciousness of gold or the linkage between gold and your child’s future marriage. Let’s consider this purely as an investment here.
I feel jewelry is definitely not so smart way to invest. First it is not pure gold. Even in 916 Hallmark you have about 8.4% of other metals like copper (916 parts per 1000, 91.6% purity). Some jewelers may even sell lower purity which is difficult to assess. Second, there are other hidden charges around wastage, making, taxes, etc, and can be anywhere between 10% and 24% over and above the standard gold rate. So imagine, as an investment, you start recovering the cost only beyond this level. Third, when you sell, you do not get the standard rate and the jeweler will cite all possible reasons for the same. Fourth and most important reason is the pain in storage.
Three of the above four hurdles can be avoided by buying a bullion coin/bar. However, storage challenges will continue.
The best way is to buy ETFs or GOLD bonds. ETFs (Exchange Traded Funds) are loosely similar to mutual funds where an investment company trades it on your behalf. Similarly, gold bonds are virtual form of gold where the government may issue these from time to time. These are on E-form and since held virtually and you will enjoy the best of both worlds. Your grand mother may not be happy with it though!
There are numerous complex investment options. Once you are comfortable with the above, you should explore these options under professional guidance. If you feel these are interesting and need a separate post to know about them, do share your comments below.
- Derivatives, Futures and Options
- Forex trading
- International Equity/Mutual Funds
- Private Equity
- Portfolio Management Services (PMS)
- Crypto Currencies
Over and above this, you are Provident fund which your employer would invest on your behalf. This is a mandatory investment scheme in India, so you have a forced way of saving and one of the safest avenues with lucrative returns.
Most importantly, do read the details of the investment, its risk-return factors and tax implications before committing your funds. And lastly for the readers outside India, some of the nuances may vary, but the idea is to provide a very simple perspective.
This is not an investment advisory. The intent is to simplify investment related concepts. Please seek professional advise before investing!