Stocks and shares and not bank deposits and small savings schemes rule the investment scene today. Here are ways to being an intelligent investor.

Investments are important for everyone to ensure future financial comfort. The investment scene today has changed from that in the 90s. In the early 1990s, return from small savings schemes and bank deposits was about 10-12% per annum. A bank deposit was the popular investment choice because it was risk free and yielded higher returns. Stock market scams had made investors wary about investing in shares. Mutual funds were yet to gain popularity. Small savings schemes though attracted only senior citizens.

The investment scene today

From the commencement of the present decade, the investment scene changed. The return from small savings schemes and bank deposits fell drastically. Though small savings schemes are now marginally better and yield about 6-8%, bank deposits yield only 4-6%(pre-tax) per annum. Also, with the coming of private banks, safety of deposits is now questionable. Simultaneously, share and stock markets have gained the trust of millions of investors. Mutual funds too have come of age and most of the mutual funds are doing well. While a few lucky investors can obtain returns as high as even 15% or more in stocks, mutual funds can make them richer by about 10-15% on their investments.

Here are some investment options that are available today:

Real Estate

The first real estate investment most people make is their home. After this necessity is fulfilled, investments in residential, commercial, industrial property and land are a good option. The value of these assets can only go upward. Direct investments in real estate should be avoided and preferably, the help of real estate consultants and lawyers should be availed, to avoid litigations. Returns and risk are high. Real estate is a long-term investment and is not considered a liquid investment because if you want to sell it quickly, you may have to sell at a lower market value. And capital gains tax may reduce the actual returns.

Insurance

With MNC insurance firms entering India, people are opting for insurance as a long-term investment strategy. Insurance is a tax saving-cum-risk coverage investment that yields lower return but at zero risk. Insurance schemes today cover one’s life, retirement, children education, property, business, assets etc. Investment in insurance may seem like a wasteful and a very long-term investment, but the actual benefits can be felt on the happening of an unforeseen circumstance. Also, the cash outflows can be planned and is generally a smaller sum, compared to other investment options.

Mutual funds

A mutual fund is an investment company that makes investments on behalf of customers. It pools resources and invests in a basket of stocks, bonds, and other assets in quantities much larger than most investors could ever afford to acquire on their own. Mutual funds hire experienced professionals to manage the fund’s investments and offer an easy and inexpensive way to diversify. Another advantage is liquidity: most mutual funds redeem existing units on demand. The Net Asset Value (NAV) indicates the value of the portfolio. Because income from mutual funds are virtually tax-free and are liquid, they are a very attractive investment option.

Stock market

In the long term, stocks generally perform better than other financial investments. But diversification of stocks is important to do well in the market. Because then, losses in one stock can be offset by gains in another. From 2004-05 onwards, there is no tax on long-term capital gain. The timing of purchase and sale is very crucial and often determines the extent of gains or losses that the individual could make. Conservative investors should avoid speculation. Borrowing for the purpose of investment is not preferable. Also, invest only so much money in the stock market that you can afford to lose.

Risk, diversification and investment allocation

Risk is the likelihood that the investment will either earn or lose money. In general, an individual who expects more return on his investments has to be ready to absorb more risk. Each individual has a different risk tolerance. Risk tolerance will be according to age, financial stability, lifestyle, and goals.

An individual can decrease his overall risk by efficiently diversifying his resources among different investment vehicles. The way he allocates his assets is a very important aspect of a successful investment strategy. The main reason for diversification is to avoid putting all eggs in one basket.

Risk, return and liquidity:

A comparative rating table under various investment options

 * The rating are only indicative and could vary depending on the scheme opted, under each investment option. 1 is the highest and 6 is the lowest.

What every investor should do.
1.    Set an Investment goal: You must know where you need to reach and how soon, in terms of returns, liquidity, maturity and risk.

2.    Decide the amount: Fix the amount you can consistently invest, either monthly or quarterly. Do not be over ambitious but invest only your surplus funds, after estimating and budgeting your expenses. Do not borrow or avail an OD, to invest.

3.    Monitor the investments: Don’t invest and forget about it. Do all it takes to monitor the investments regularly and watch it grow or decline. Be in control of your investments.

4.    Don’t park all your investments in options yielding fixed income. Take some exposure and invest in growth investments, else the inflation will actually reduce your purchasing power and not increase it. Do not speculate but invest in the right options after measuring the risks.

5.    Invest sufficiently in property insurance, asset insurance, life insurance, medical insurance, personal accident care, and disability insurance for self and family.

(The author heads Best Praktizes, a financial and statutory outsourcing firm in Bangalore. Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it )

Issue BG45 Dec04

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