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A Guide to your Investments

As rightly said an individual doesn't become rich by his high income but by his right investments. There are couple of factors which influence one's decision to invest. Apart from his financial goals, his risk taking ability, his age, amount of money to invest decide where he wants to invest. Below is a step wise process which a beginner should follow to invest his hard earned money.

Your Investment options
  1. Step 1: Make a note of your savings

    First of all one needs to make a note of his monthly expenses in the form of rent, petrol, grocery, entertainment, EMI if any etc and subtract the same from his total income from various sources namely salary, interest, rent etc. This figure gives his monthly savings.

  2. Step 2: Identify the essentials

    Next one needs to identify the essentials which are important for a peaceful life. For example

    1. Emergency Fund: One might require some fund to cater to medical emergency, accidents or job layoff. Emergency Fund should be liquid in nature so that it can be taken out immediately. One should keep a part of the emergency fund in savings account and rest in liquid instruments like Fixed Deposit etc.

    2. Life Insurance: In order to hedge oneself against uncertainties, the earning member of the family must have a life insurance cover. There are plenty of insurance instruments available starting from pure insurance like Term Plan to investment plus insurance instrument Endowment Plan and ULIP. For finding the right insurance plan for you read http://couponkosh.com/blogs/insurance_products.


    3. Health Insurance: This is another insurance which proves very handy in case of an illness in the family. Health insurance of your dependent family members is a must as otherwise a disease in the family can pull you down by several notches and all your investment plans can go wrong.


  3. Step 3: Note down your goals

    One needs to now list down his Long Term and Short Term Goals. Long Term Goals are the ones which have a time horizon of more than 5 years. Some examples of Long Term Goals would be

    1. Rs. 15 lacs for Child's Higher Education after 15 years.

    2. Rs 30 lacs for Child's Marriage after 25 years

    3. Rs 50 lacs for Retirement after 30 years

    While deciding the long term goals do take into account inflation

    Short Term Goals are the ones which consider a time period of less than 5 years. Some examples are

    1. Arrange Rs 10 lacs for down payment for buying a house in 3 years

    2. Pay off debt of 5 lacs in 1 year

    3. International Trip requiring 3 lacs in 2 years

  4. Step 4: Invest Separately for Short Term and Long Term Goals

    For Short Term Investments it's advisable to invest in low risk instruments. Some of these are as follows Your Investment options
    1. Savings Account: It is the most basic form of investment where you get highest liquidity with minimum returns. It provides flexibility of investing money as per your choice. Thus in one month you can have low savings which can go high in the next month.

    2. Fixed Deposits: If you have a lump sum amount and a time horizon of 6 months to 2 years you can go for fixed deposits. This is a safe instrument and gets higher returns than savings account.


    3. Recurring Deposits: If you don't have a lumpsum but a regular monthly inflow you can go for a recurring deposit. This provides returns of the order of FD's and you can invest money on monthly basis.

    4. Liquid Funds or Money market funds: Liquid Fund is a special category of mutual fund that invests primarily in various types of money market instruments such as term deposits, commercial papers and certificate of deposits. These liquid funds have either no or very low lockin period and hence the money can be withdrawn in 24 hrs. Liquid Funds provide higher returns than savings account for sure and at times even upto fixed deposits.

    5. Fixed Maturity Plans/ Monthly Income Plans: FMPs and MIPs are investment instruments that primarily invest in debt funds and a small part of the fund (15% to 20%) in equities. The returns are higher than fixed deposits but are not guaranteed. These are best for those people who are ready to take some risk in order to get higher returns.

    6. Corporate Deposits: Corporate Deposits are fixed deposits made with a company rather than a bank. They have a potential of giving returns upto 9%-12% in a period of 1 to 3 years but they are unsecured and hence risky. Thus it is advisable to invest in this instrument only if you have prior knowledge about it.

    7. Treasury Bill: It is a low risk short term investment (less than a year) instrument issued by the Central Government. It comes in 3 types - 91 days,182 days and 364 days. Minimum amount to be invested is Rs 25,000 and they are auctioned at regular intervals by RBI. They are issued at a discount to face value and on maturity the investor gets the face value.


    In longer term even higher risk instruments tend to give higher returns. Hence it is advisable to go for more risk for long term investments
    1. Equity/Shares: Equity investment or direct purchase of shares is a very good investment for long term as over a period of 15 years you might get returns as high as 20%. However since this investment is purely market linked the possibility of having a loss is also there though in the long run the chances are negligible.This investment requires frequent tracking of your portfolio and taking action as and when required. A beginner should invest small amounts and in multiple shares to lower down the risk. The key to good returns is being vigilant and patient.

    2. Mutual Funds: When one doesn't have time to track the portfolio or lacks knowledge about equity market but still want to invest in equity, mutual fund is the choice for him. One can choose the kind of mutual fund he wants to invest in depending on his risk taking appetite. For eg a debt fund would be less risky but at the same time give less returns as well in comparison to equity funds.


    3. Public Provident Fund (PPF): For those who are risk averse and are happy with relatively low but sure returns should invest in Public Provident Fund. PPF has a locking period of 15 years which can be extended by blocks of 5 years. The profits earned from this instrument are totally tax exempted and investment gets you a rebate in 80C. But if you are young and are ready to take risk experts advise against investing in PPF. The reason for the same is though the PPF returns of 8.7% look high on the face of it but when compounded for longer term of 15 years they don't even seem to cover inflation in the current scenario.

    4. National Savings Certificate (NSC): NSC is another instrument for getting low but certain returns with tax benefit on both investment and returns except the last year. There are two types of NSC namely NSC Issue VIII and NSC Issue IX with interest rate of 8.5% and 8.8% respectively. The maturity period for NSC Issue VIII is 5 years and for NSC Issue IX is 10 years.

    5. Real Estate: Real estate has been a good investment option in India as due to high population density land is a coveted asset here. The main factor to take care while purchasing a flat/plot is its location. Buying any piece of land which doesn't have a very high demand now but is expected to be longed for in future can make you a billionaire in no time. Real Estate can easily get you a return of 30% to 100% YOY in long term. But investment in real estate requires proper research, a large capital and long commitment. Moreover it is not a liquid asset and selling it takes a long time.

    6. Tax Free Bonds: In the fixed income space along with PPF, FD and NSC we have another investment instrument called Tax free Bonds. It scores high on returns and risk parameters and in addition you don't need to pay any tax. Only drawback it has is it doesn't have liquidity. The lock in period is 10-20 years and you get a tax free return of 8.5%-9% paid annually. Thus it proves to be a very good instrument for retired people who have a lumpsum corpus and want to invest the same to get a fixed income annually.

    7. Gold: India being the second largest consumer of gold, we Indians have always had a strong affiliation for gold. As far as investment is considered it had given good returns from 2005 to 2011 but post that it has plummeted. Gold still retains its shine as a diversification instrument. It is prudent to diversify your investment portfolio so that a fall in one instrument is balanced by the other. Gold is known to move inversely as equity and currency and hence is a good diversification instrument. Moreover it is just next to cash when liquidity is measured. Apart from physical gold , it is available in various forms like Gold ETF, Gold Funds, e-gold etc as investment instrument.

    8. ULIP/Endowment Plan: These are insurance cum investment instruments where one part of premium is used to provide insurance cover and the other is invested in debt or equity funds. They give low returns as compared to a term insurance + mutual fund combination hence is not recommended.

Conclusion

Don't put all your eggs in one basket so have a good mix of equity and fixed income instruments so that you are hedged against the volatility of equity and mutual fund but at the same time are poised to get a decent return definitely better than fixed income instruments. The percentage of contribution to different asset classes would depend on your risk taking appetite and your goals. Also while evaluating any instrument it's advisable to study its performance for past 4-5 years as though past doesn't guarantee a great performance but is definitely a reflection of future.

Sources

http://www.moneycontrol.com/news/gold/how-to-investgoldindia_983090.html http://www.cnbc.com/2016/04/25/bonds-a-lousy-proposition-warns-ex-gic-sio-ng-kok-song.html http://www.simpleinterest.in/ http://www.simpleinterest.in/10-best-long-term-investment-options-in-india/ http://www.policybazaar.com/life-insurance/investment-plans/articles/top-10-short-term-investment-options/

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