Investment Lesson: Learn Today, Reap Profits Tomorrow
Investment is the procedure of buying assets for generating higher returns. The income can be in the form of either “regular income” as well as “capital appreciation”. Depending on the varied interests of the general public, belonging to several sorts of social circles and having varied financial requirements, there are plenty of investment opportunities that are currently in circulation in the market. Therefore, it becomes a challenge for the general to assess which options will yield high returns, based on individual financial needs.
How to assess what is a good return?
There are four principal methods of assessing what is a good return:
- Monitor average inflation:
The statistics of India during the past decade reveals that the inflation rate has been around 5.1% p.a.
However, this is only the official data. If the data of urban Indians are considered like medical inflation, health inflation and education inflation, then the overall inflation would be much higher than 5.1%. Therefore, the investment option must be considered as high returning if it generates profit of at least over 5.1% p.a.
- Index growth:
The two major indices of India are Nifty and Sensex. Regular monitoring of the growth indices will provide you with a basic idea regarding how much average return one can expect from long-term equity investments.
- Government bond yield:
A ten-year government bond of the country is currently yielding 5.35% p.a. as on Dec 23rd, 2020. Therefore, the return-expectation of the long-term debt funds should be ideally above 5.35%.
- Savings Deposits rate:
Whatever the prevalent rate of savings deposit, is counted as the minimum zero risk investment return. For example, the Savings Account Deposit Rate of SBI Bank as on Dec 23rd, 2020 is 2.7% p.a. Hence this is considered as the risk-free rate of interest.
While discussing returns, you should also consider measuring the returns in comparison to the risk of losing it. The idea is to receive the best returns with minimum risk of loss.
Why is the investment necessary?
The investments are essential to building a strong financial standing and taking care of the future needs of life. Savings may not always be sufficient to meet such targets. Hence, investments are essential. No matter whatever the ultimate financial target may be small and regular investments towards fulfilling that personal goal is enough to meet the requirement.
Elimination of debts
The primary step towards obtaining a good financial footing is to get rid of costly debts as early as possible. You can almost reduce your financial burden by 30% by paying off your credit card debts. No savings or investment policy may yield you as high returns as 30%.
Here is a list of various sorts of debts along with their respective interest cost:
- Credit Card:
An unpaid credit card balance attracts as much as 25%-36% interest p.a. compounding.
- Personal Loan:
These are unsecured loans which charge as high interest as 15%-20% p.a.
Therefore, before investing anywhere first clear off these dues.
- Education Loan:
The cost of education loan in India normally ranges between 13% and 16%. Considering the age factor, these loans can be managed better.
- Secured Loans:
The loans granted against security are called secured loans like a car loan, home loan, gold loan, etc. The risk of loss remains minimum for the banks with these sorts of loans. The rate of these loans generally ranges between 8.5% and 12% p.a. in India. Only a Home Loan has a tax advantage while the others do not.
It is better to clear off all these dues which do not provide any additional benefit to make a successful investment profile. You can never be 100% debt-free, as credit card balances are ever-revolving, but it is better to minimise high-interest debt so that you can concentrate on your investment portfolio.
Paying yourself first is a concept that encourages healthy investment strategy with careful planning. This is done by shifting a certain pre-defined portion of the income to another savings account. This portion is then utilized to buy investment instruments. This is considered to be one of the basics of successful investment planning.
Where to invest?
There are a host of investment strategies available in the market. Based on the financial targets, requirements, risk appetite and investment horizon, you must wisely choose the avenues for successful investment results. Here are some of the most common types of investment tools:
- Direct Stocks:
This is probably the best investment option available to the general public. But you need to be wise and alert during stock market investment for optimum benefits.
- Equity Mutual Funds and ETFs:
This is the ideal investment option for those who are interested in equity investment yet does not possess much knowledge about direct stock investment. All the necessary details are taken care of by the respective mutual fund manager available against a charge.
- Debt funds:
The debt funds are quite less risky financial investment instruments including bonds, company deposits, etc. Although lower risk involvement, yet the returns are comparatively lower.
This is a type of mutual fund that involves physical real estate properties including, malls, office spaces, etc.
- Physical real estate:
Investors with high disposable capital can very easily choose to invest in physical real estate like land, apartment, etc.
The current age allows gold investment without the purchase of physical gold but through e-gold. This sort of digital gold allows the benefits of gold investments without the worry of storage or theft.
Although Insurance should not be considered as an investment, there are some products like Endowment and ULIPs, which are very investment-oriented in nature. Hence these products can be utilised for the investment-related query.
Diversification is the key
As the size of the investment portfolio grows bigger, the necessity of diversified instruments also grows big accordingly. When the portfolio remains small, you may not be able to afford diversification. But with considerable expansion, it becomes the primary tool to possess optimum investment benefits.
Overcome mental blocks
This is the primary step to begin coherent financial planning of successful investment planning. Most of the beginners encounter these types of mental blocks before beginning to invest, but overcoming them is the key to success.
- I cannot afford investment:
Irrespective of the current financial situation, there always remains some avenue or the other open for investment. Seek, explore and utilize that option to the full for successful investment.
- Will begin soon:
Procrastination is one of the biggest blockages in the investment journey. The more you start early the better benefits you will receive in the long run. Moreover, it will also enhance the overall wealth corpus thus securing a strong financial footing.
- Avoiding equity for the associated risks:
Stocks, mutual funds, equities possess the capacity to yield inflation-beating returns. Therefore, it is not wise to negate these options from the portfolio because of the associated risks.
These are the basics of investment in India. The earlier you learn to grasp its potential the better it will turn out for your financial future and wealth creation. Begin early. If you haven’t started already, then there is no better day than today. But do be wise enough to invest your money for overall corpus growth and tax planning.