Now, Let us make a first step towards the brief understanding of investing. i.e. How to invest? Where to invest? and When to invest? And finally at the end of this exciting journey you will be able to find out the perfect investment options for you. Let us discuss it one by one.
You all know about this investment option. I only want to tell here some of its aspects. In India a fixed deposit with any bank will fetch an interest of 7 to 10%. Now you know that the income of interest on FD is taxable. The result is that if you are getting a 10% interest, you are only earning mere 7% because 3% will go as tax.
One more thing we have to note here is that our country's growth rate is above 8 % and your fund on FD have the potential of growing 7%. Let us also see that what we get when we tally it with inflation. You know that we are living in country where annual inflation rate is in between 6 to 10% hence we cant say that the fund with a bank FD is growing.
- PUBLIC PROVIDENT FUND (PPF)
PPF is a safe option of investing. It gives 8% interest which is not taxable. It also reduces the tax burden.........taxable income is = total income - money invested in PPF.
But there is a limitation for investment in PPF and it have term of 15 years. You will be able to withdraw it partially after the 6th year.
Gold is a common investment option even by the wise investors. But if you go deeply to the performance of appreciation of gold you will find that, in a long term basis it will give you only a moderate income. From 1990 to 2000 the value of gold appreciated only about 6.5% per year and you can find if you look at a larger time frame of 20 years from 1990 to 2010 it appriciated about 11.5% per year. But during the period of financial crisis i.e. 2007 to 2009 it appreciated 50% per year. What you can learn from this? Yes........ you are right. Gold is a fantastic investment during difficult times like economic crisis or war.
Now let us see how to invest in gold. There are 3 types of gold you get in the market. They are:-
1. Gold Ornaments from Jewelers.
2. Gold coins and bars from Banks.
3. Gold Exchange Traded Funds from Market (GOLD ETF)
You are aware of the first 1 &2 so let me give some brief about 3. Gold ETFs are similar to mutual funds and traded in market. When the price of gold increases the price of ETF also increase. The main advantage of GOLD ETF is that the customer do not have to face any of the problems related with buying and holding actual gold like checking purity or facing the risk of gold getting stolen etc.
You can also save on taxes and additional expenses on GOLD ETF than the actual gold.
For example if you want to buy actual gold in the form of Jewelery, coin or bar you have to pay an additional of 15 to 20% as making charges or bank charges. But in GOLD ETF it a mere 1 to 1.5 % as entry load.
Term insurance is a very good investment option which every one should have to get insurance cover. Here you are entitled to get an insurance cover for merely paying about .5% or even less as premium per year and at the same time you are saving also.
- ULIP (UNIT LINKED INSURANCE PLAN)
These are long term investment options which provide you both insurance cover and return on investment. An investor have to pay yearly premiums here and in return he receives units of ULIPS. The money is invested by the Fund Managers in various investment options like shares, bonds, debentures etc and if these investments performs well then the unit holders are profited.
But in my opinion ULIPS are poor performer as an investment and an insurance option. Why?... It is poor as an investment because Mutual Funds perform better than ULIPS. Now if you ask me why again I will say that it may be because of the high fees and charges by the ULIPS. After deducting these charges only the remaining money can be invested to earn profit. Mutual Fund segment is more competitive than the ULIP segment. Due to this, the Fund Managers with the best track records are engaged in Mutual Fund Segment and ULIP segment may get less skilled Fund Managers.
Now why it is a poor performer as an insurance option? A term insurance policy with a premium of 4000 to 5000 is enough to get a life cover of 10 Lakhs. But in ULIPs the premium comes more than 1 Lakh to get a live cover of 10 lakhs.
These are very popular investment option. Investors gets units of Mutual Funds for the money invested in it. These money is invested in different options like shares. bonds etc by the fund managers and the investor will make profit if it is performed well. Mutual Funds normally hire well to do expert investors as Fund Managers.
Most mutual funds provide 2 types of investing options for customers. 1) One time investment (full money is to be invested in one go). 2) Systematic Investment Plan (SIP). Here the customer get the option of investing as easy installments.
There are Many types of Mutual Funds. Let us try to understand here some major types of them.
Equity Based Mutual Funds These Funds invest money in share Market and have higher profit potiential and higher risk. There are many categories in these types of Funds and let us try to understand it.
a) Sectoral Mutual Funds. These funds invest their money only in a single specified sector of share market. Like Information Technology, Banking, Metal, Pharmaceutical etc. and if this particular sector performs then the fund will be in huge profit and the other hand it will be in a huge lose. So investing in these types of mutual funds are high risky.
b) ELSS (Equity Linked Saving Scheme) This is a best option for saving taxes. It has a lock in period of 3 years. Apart from this lock in period it is all similar to diversified mutual funds.
c) Diversified Mutual Funds In these types of funds the Fund Manager have the freedom to invest the money in any sector or any company. These funds are managed by high profile fund managers and with large amount of money. The greater flexibility allows this funds to perform well and have a chance of getting higher profits. These funds always seen performing a little better than ELSS funds. This is a good place for your investments if you are deciding to invest in mutual funds.
d) Index Mutual Funds These Funds are mainly concentrated on indexes like NIFTY SENSEX etc. Example, an intex mutual fund based on sensex will only buy and sell the 30 shares of sensex in the same weightage. The cost of asset management fee is less in this type of funds because they not need high skilled expert for such funds.
Debit Based Mutual Funds. These mutual funds invest on exchange traded debit based financial instruments like government bonds, debentures etc. These will perform very little in earning profit and with a very little risk.
Index Exchange Traded Funds (Index ETF) ETFs are financial instruments traded in the market like shares. Index ETFs are trying to track the indexes. Nifty BeEs Junior BeEs are the examples of this types of ETFS The asset management charges for these types of funds are very low and there for it is a very good option for investments.
It is a wonderful way of investment in long term basis when you have huge money. The advantage of this investment is that you earn more than 30 % a year if you are being invested in this for longer time frame above 10 years. The disadvantage of this investment is that you can not invest in it with small amount lie 10000/- or on installment basis. Coming out of your investment like selling out a property also is a little longer process compared to any other investments.
It is an accepted fact by the investment expert that share market gives the highest profit than any other investment tools. But not for all investors. Some investors simply depend on tips they receive from different sources like brokers, TV channel experts and friends. Such investors always lose their hard earned money. You should have a right knowledge to make profit from the share market. You should have the knowledge of what company your are investing, what sector it belongs to, Fundamentally how strong is the company in which you are puting your hard earned money, how the script performs in the market etc. You should also spend some time to track your investments in share market
HAVING AN INSIGHT TOWARDS INVESTING
I think we have discussed almost all types of investments here now and this is time to have an insight of it all together. Now let us try to find out how one can invest. Of course it differs according to the persons income and risk affording capacity. But let us learn how an investment option is selected by tallying them each other. You know now that Share Market it the best place to invest (if invested wisely) for a maximum return with moderate risk. You also know that Real Estate is an investment option where you will get a moderate return in long term with the lowest risk. You are also aware of the risk to reward of all other investment options
Now let us try to put in the way of achieving our investment goals.
Goal No.1 Insurance coverage. Go for a Term insurance policy No risk at all
Goal No2. Saving Taxes Buy a home with Loan No risk at all
Go for ELSS MF Moderate Risk
Invest in PPF No risk at all
Goal No.3. Accumulating Invest in share market Moderate Risk
wealth Invest in Gold ETF Moderate Risk
Invest in Real Estate Moderate Risk
We will try to learn the art of mingling all three goals together and making a portfolio in the next post.
Hope you enjoy this,
