WHY & WHERE to Invest

WHY & WHERE to Invest

WHY to Invest?

There are a few compelling reasons for one to invest.

1.    Fight Inflation: By investing one can deal better with the inevitable – growing cost of living 

2. Create Wealth: By investing one can aim to have a better corpus by the end of the  defined time period. The time period can be anything – children’s education, marriage, house purchase, retirement holidays, etc.

3.    To meet life’s financial aspiration

 WHERE to Invest?

Having figured out the reasons to invest, the next obvious question would be – Where should one invest, and what are the returns one could expect by investing.

When it comes to investing one must choose an asset class that suits the individual’s risk and return temperament.

An asset class is a category of investment with particular risk and return characteristics. The following are some of the popular asset classes.

Fixed income instruments

Equity

Real estate  

Commodities (precious metals)

 

Fixed Income Instruments

These are investable instruments with very limited risk to the principle and the return is paid as an interest to the investor based on the fixed-income instrument. The interest paid, could be quarterly, semi-annual or annual intervals. At the end of the term of deposit, (also known as maturity period) the capital is returned to the investor.

Typical fixed income investment includes:

1.    Fixed deposits offered by banks

2.    Bonds issued by the Government of India

3.    Bonds issued by Government related agencies such as HUDCO, NHAI, etc

4.    Bonds issued by corporate’s

As of June 2014, the typical return from a fixed income instrument varies between 8% and 11%.

Equity

Investment in Equities involves buying shares of publicly listed companies. The shares are traded both on the Bombay Stock Exchange (BSE), and the National Stock Exchange (NSE).

                                       

When an investor invests in equity, unlike a fixed income instrument there is no capital guarantee. However, as a trade-off, the returns from equity investment can be extremely attractive. Indian Equities have generated returns close to 14% – 15% CAGR (compound annual growth rate) over the past 15 years.

Investing in some of the best and well-run Indian companies has yielded over 20% CAGR in the long-term. Identifying such investment opportunities requires skill, hard work, and patience.

Taxation on Equity investments held for more than 365 days is taxed at 10%, if the gains are more than Rs 1 lakh starting from 1st April 2018(previously such investments were tax-free). This is comparatively a lower rate of tax than the other asset classes

RealEstate

Real Estate Investment involves transacting (buying and selling) commercial and non-commercial land. Typical examples would include transacting in sites, apartments and commercial buildings. There are two sources of income from real estate investments namely – Rental income, and Capital appreciation of the investment amount.

The transaction procedure can be quite complex involving legal verification of documents. The cash outlay in real estate investment is usually quite large. There is no official metric to measure the returns generated by real estate, hence it would be hard to comment on this.

Commodity 

Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver over a long-term period have appreciated in value. Investments in these metals have yielded a CAGR return of approximately 8% over the last 20 years. There are several ways to invest in gold and silver. One can choose to invest in the form of jewelry or Exchange Traded Funds (ETF).

A note on investments

Investments optimally should have a strong mix of all asset classes. It is smart to diversify your investment among the various asset classes. The technique of allocating money across assets classes is termed as ‘Asset Allocation’.

For instance, a young professional may be able to take a higher amount of risk given his age and years of investment available to him. Typically, investors should allocate around 70% of their investable amount in Equity, 20% in Precious metals, and the rest in Fixed income investments.

Things to know before investing:

Investing is a great option, but before you venture into investments it is good to be aware of the following…

• Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return.
• Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky.
• Investment in Equities is a great option. It is known to beat inflation over a long period of time. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky.
• Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always must wait for the right time and the right buyer or seller to transact with you.
• Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.