Which investment is best for you?


This is one common question that wannabe investors ask. They want to know which type of investment is better for them in terms of returns. Before deciding what assets suites you best, you need to the following questions.

  • How much money do you have ?
  • How long are you willing to stay invested?
  • How much risk you’re wiling to take?
  • At what age do you plan to start investing?
  • What’s the degree of liquidity (convertibility into cash) you require?

The first factor is your financial capacity. You can enter the field of real estate investing only f you have a lot of money, say at least 15 to 20 lakhs. That’s minimum investment at this point of time. Arts and antique investments will cost you even more. So these types of investments are not for a person with very limited funds. Such investors can think of investing in gold or stocks or mutual funds since the initial amount required is very less.

As a general rule, all assets grow in value as time goes. So it doesn’t really matter where you’re invested in. For example – If you had invested in the shares of Wipro 25 years back, very few real estate investments can surpass the wealth you would have made. On the other hand, assume that you had invested in a beach front property in Mumbai in the 70’s. 40 years later, the wealth that has been created would be huge. What would be your wealth had you invested Rs 100000 in gold in 1970? It was just Rs 184 for 10 grams in 1970; today it’s approximately 26,000 for the same. Imagine the money you would have made. So, in the long term, all assets would create wealth. How long are you willing to stay invested?

The age at which you start investing is another important factor to be discussed here. For example consider any of the examples above. If you were at the age of 50 when you invested , any of these investments would have grown in the same way, but by the time you achieve these results, you’d at 90 or even more. So that’s another point consider. If you’re investing for your next generation, age is no problem at all.

All investments carry risk. When you invest in an asset, it’s possible that its value may gyrate illogically. You should know how to handle risk and for that, you should asses you risk bearing capacity. For example, if you are not wiling to take any risk your only option is to invest in fixed deposits of banks, government bonds and gold.

We are listing down the pros and cons of different types of investments. You should be able to choose which works best for you after reading this.

REAL ESTATE-Comfortable Investment.

  • Real estate investments involve huge amounts of money.
  • Unlike stock, here you buy something which you can see and feel. You buy it after physically inspecting it.
  • It’s a traditional investing option which everyone is comfortable with.
  • It’s comparatively difficult to be defrauded in real estate investments.
  • The property has to be safely guarded.
  • As time moves on the land keep appreciating in value whereas the building it it keeps depreciating in value.
  • You should be willing to wait at least 6 -10 years to get a solid return.
  • Liquidity is low when compared to stocks. To sell a property, it may take 3 or 4 months.

GOLD – Solid & safe investment:

  • Gold is considered as a safe investment, an insurance against inflation.
  • It’s a consistent performer.
  • It’s difficult to store gold. Security is a major issue. Even if you keep gold in bank lockers, most of the lockers provided by the banks do not have insurance cover.
  • You can start investing with little money.
  • Gold investments can be done through ETF route. ETFs are instruments that invest in 99.5 per cent purity gold. . Every unit of gold ETF you invest is euivqlent to 1 gram of physical gold. All you need for investing in gold ETFs is a demat account and a trading account with a broker.

STOCKS – The greatest wealth creator.

  • In-spite all of the stock-market crashes, stocks are one of the greatest wealth creators for investors.
  • Stocks give business ownership. For example, when you buy shares in Infosys, you are the owner of Infosys to that extent. You benefit from the company’s profits. The shares of highly profitable companies rise in value over a period of time.
  • They also pay their shareholders a portion of their profits in the form of dividends and bonuses. Hence you benefit both ways- increase in value of the share and dividends.
  • Diversification is easy when you invest in stocks.
  • All it takes is a little investment. With as little as Rs 10,000 you can start investing in companies.
  • Liquidity is very high. You can sell you shares in the secondary market within seconds and take your money.
  • It’s easy to be defrauded in stock markets. The world’s best auditors may be in control, there may be strict laws that govern companies but still- It’s easy to be defrauded in share markets.

ART AND ANTIQUES: It’s complicated.

  • Art and Antiques are interesting and profitable alternatives, but it is also extremely risky.
  • Art can never be considered as financial asset.
  • There are no proper yardsticks for measuring arts.
  • It’s highly illiquid and there is no organized market to buy and sell arts.
  • The investment required is very high.
  • It would be very difficult to store and protect art pieces.

FIXED DEPOSITS:  Sure shots

  • These are the most liquid form of investment.
  • The return is already known and hence, you invest in it only if the percentage of return offered by the institution is agreeable for you. So, there no question of being dissatisfied with the returns.
  • You can plan your finances according to the money flow expected.

YOU CAN ALSO BALANCE YOUR INVESTMENTS TO GET THE BEST OF BOTH WORLDS-

For example –

If you are someone who knows the real estate field well, you can invest in the shares of real estate companies-

By doing that, you take part in the overall real estate boom in the country (and not in a particular area’s price hike). If you need money urgently, those Stocks can be sold in a matter of seconds. It offers liquidity that no real estate investment can match.

Let’s assume you have shares worth 40 lakhs in DLF and you urgently need 2 lakhs to meet your parent’s medical bill. You can immediately sell 5% of your shareholding and raise 2 lakhs or you can pledge your shares and immediately raise 2 lakhs.

Instead, assume that your money was invested in one of DLF’s apartment. Can you sell 5% of your Flat? No. The only option is to either pledge you’re flat or borrow money. Both takes time.

CONCLUSION.

Having explained so far, now it’s your call.–Go ahead according to your budget, knowledge and risk taking ability! And don’t forget our 22nd principle!

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Where can you invest?

Wealth creating assets in which you can invest can be broadly classified into the following classes:

  • Equity or stock market investments including mutual funds
  • Debt or fixed deposits and government bonds
  • Gold & diamonds and other precious metals
  • Real estate
  • Art  and Antiques

So, it’s either financial assets including securities market related instruments or physical assets.

EQUITY
When compared to any other class, investing in equities is definitely riskier, more rewarding than you can imagine and every exciting too. World over, and in India stock have outperformed every other asset class in the long run. An investment of just Rs.10,000 in  companies like Infosys , Ranbaxy , Cipla and Wipro in 1980’s would have grown into Crores and Crores of rupees by now . As an equity investor of a company, you become part owner of that company and hence participate in the overall growth opportunities of the same. However, as said earlier , equities are risky investments. Hence, you cannot put all your money into equities.

DEBT
Debt investments includes fixed deposits with banks, debt mutual funds and government schemes where you will be rewarded a fixed rate of interest year on. Debt schemes are popular because it carries less risk, you get definite income by the year end and your income is always predictable. This is not to say that debt instruments are risk free. They too, carry risk. Even governments can default in repayment. Secondly, inflation is another serious risk.. We have already talked about inflation earlier.So, putting all your money in debt is not a good idea. Yet,  it is essential to have some amount of money invested in debt – to bring stability to your investments.

GOLD
Investors must have this item in his portfolio in order to diversify and also reduce the risk and volatility in his portfolio and to bring consistency. Especially in India, gold is the most liquid investment. Bank fixed deposits, national savings certificates etc would take at least 3 to 6 days to concert to cash. But gold can be converted to cash almost instantly over the counter.

REAL-ESTATE
If you have lakhs or millions in your bank account, real estate investments are for you. This class of investments gives high returns at lowest risk. The benefits of investing include – higher risk adjusted returns, assured regular income and definite capital appreciation. However, you need to be careful in this filed too. In most Indian cities, real estate prices are at its peak and consequently, getting target returns out of it has become quite confusing. Nature and volume of income from it depends whether your property is in a residential area or commercial area or is it a vacant space fit for godowns/storage houses or is it an open space fit for wind mills and industries. Real estate investments are one of the most illiquid investments. Normally it takes at least 5 to 6 months to convert it to cash. One more disadvantage is that you need at least 15-20 lakhs to start investing.

ARTS AND ANTIQUES
If you have the money and the guts to try something new and exciting-consider arts and antiques. Especially art. It is supposed to be the next big asset class. Earlier, it was not considered as investments but now, works of great artist are sold for millions. The key is to find out artists who have the potential to become high profiles in he future. But, for that you need to know about the subject thoroughly. Experts say that  the Indian Art market is growing at rate of  40%  yearly.  However, art , as an investment vehicle, has many negatives.  You cannot go out and suddenly sell off the masterpiece you own. The art market is risky because -

  • The valuation is always subjective and there are no hard and fast rules for valuation.
  • There is no regulation what so ever to ensure any sort of transparency.
  • The liquidity part is always doubtful.
  • It’s one asset class which cannot be pledged.
  • It’s difficult to store fine art pieces.

WHAT’S NOT CONSIDERED AS PURE INVESTMENTS

  • INSURANCE
  • Insurance is nothing but an agreement between the insurer (The Insurance Company) and the insured (You) to pay an amount as compensation if any unexpected event occurs.The goals of Investment and Insurance are totally different. A lot of us take Insurance policies as investments. It’s a wrong approach and needs to be corrected.

  • DERIVATIVES
  • Derivatives( futures and options) are very destructive. These are not investments. Derivative financial instruments can be used for protection from losses (technically called hedging).If derivative investments used in amateur hands, they can be very dangerous by bringing excitement: fast results, quick loss or thousand fold profits may pull in the vortex of emotions and don’t let out until everything will be lost.Derivatives as investment instrument should be considered only in carefull professional hands.

CONCLUSION

Equities , debt and gold and within the reach of any one. You can always invest small amounts of your savings into those three categories. These three category of investments are well regulated by the government. Real estates are solid  investments, but requires lot of money. Art and antiques are risky investments. They are not regulated.

A proper investment plan would be to create a balanced portfolio that consist of equities, debt and Gold. Real estate is also preferred – Provided you have the money to invest.

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The story of Adolf Merckle

Adolf Merckle was one of Germany’s richest business man. He developed his grandfather’s chemical wholesale company into Germany’s largest pharmaceutical wholesaler, Phoenix Pharmahandel . He was educated as a lawyer,  but spent most of his time investing. He lived in Germany with his wife and four children.

In 2006, he was the world’s 44th richest man. Merckle’s group of companies employed 100,000 workers and had an annual turnover of 30 billion euros (around 39.9 billion U.S. dollars).

All this turned upside down after his business empire was plunged into difficulties due to the financial crisis. Merckle hit the headlines in 2008 when he suffered massive losses on investments he had made on movements of the share price in Volkswagen, Europe’s largest car company.

On Jan 06,2009 German news agency DPA reported that –  Merckle, 74, threw himself under a train at his hometown of Blaubeuren, a small town near southern Germany city of Ulm, and a railway worker found his body by the side of the track.

Before his death, he had been negotiating with banks for a bridging loan of 400 million euros (around 547 million U.S. dollars) to save his empire, which includes the pharmaceutical company ratiopharm and drugs maker Phoenix. That figure shows the depth of financial crisis he had.

The picture above shows the place where his body was found. What a tragic end to the life of one of the world’s richest man.

…MERCKLE ISN’T ALONE


Here’s more -

In Jan 2009 , The national suicide preventing hotline in US reports that, calls have soared by as much as 60 per cent over the past year – many of the  calls were from people who have lost their home, or their job, or who still have a job but can’t meet the cost of living.

A 45-year-old businessman in Los Angeles murdered five members of his family before turning the gun on himself, saying in a suicide note that he had done so because of his troubling financial situation.

Karthik Rajaram, 45, who had made almost £900,000 on the London stock market, shot his wife, three children and mother-in-law in the head before shooting himself at the family home near Los Angeles.He did this after seeing his family’s fortune wiped out by the stock market collapse.

A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.

In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from her husband sends a note to the mortgage company warning: “By the time you foreclose on my house, I’ll be dead. Then, Carlene Balderrama,  shot herself to death, leaving an insurance policy and the suicide note on a table.

WE INDIANS AREN’T BEHIND..

Thousands commit suicide unable to bear the pressure and crisis, that mismanaged investments create.

Internet and newspapers report about people falling prey to financial frauds like ‘get-rich-quick’ schemes and money chains, eventually losing every penny they had earned.

Did you know that a small state like Kerala spends more than Rs 40 crores a day on lottery tickets alone?According to Tehelka.com’s reporter Shantanu Guha Ray , Illegal lottery tickets account for atleast 60 per cent —Roughly Rs 7,200 crore — of the Rs 13,000 crore gambled every year on lottery tickets in India. All sections of the society are involved in this. I know doctors, HR consultants, engineers, stock market investors, Government officials,housewives and students who regularly put money in lottery tickets. Anyway, lottery tickets ( if you’re lucky to get an original one :) ) at-least gives you a chance to win.

There is another section of people who gets involved in money chains – where wealth gained by participants entering the scheme earlier, is the wealth actually lost by those coming later. In-spite of hearing about many schemes in which people have lost their wealth, India continues to be a happy hunting ground for such fraudulent operators. The root cause of all this can be brought under one head-Greed for money and  financial illiteracy.

This is exactly the reason why we will first discuss about the basic principles of money management . People spend lakhs to get a  doctor’s degree or a MBA from the most prestigious of  institutes. They spend a lot to pursue their hobbies such as music and salsa.  But when it comes to managing their money , they hardly make any effort to learn  at-least the basics , forget about gaining specialized knowledge !

The next chapter will take you through the basic principles of money management. These principles are important to everyone out there– housewives, businessmen,musicians, students, professionals , priests , social workers.. anyone who deals with money directly or indirectly.

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Why is investing important?

50 YEARS BACK.

Recall the scenario when your parents were working…In those times, it was common for people to stay in the same job all their working lives. Most of them had government jobs where job security was ensured. Opportunities were limited. So they were content with what they had.

With whatever financial assistance and savings they got, they managed to raise children, educate them and buy a home. Medical field wasn’t so technology driven and expensive.

When they retired, they got the benefit of pension that has dearness allowance built in so that, their pension pay grows with inflation. And, they expect their children to look after them in their old age.

NOW..

But now, times have changed. Most people work in the private sector where there is no guaranteed job security. But, every sector has an ocean of lucrative job opportunities to offer.  This generation lives in a very competitive world than ever before.

It’s a situation where they need to work really hard to make a mark.At the same time, they need to look after their aged parents, take care of their children’s needs, and fulfill their own dreams.

Medical expenses and retirement are real big issues.With advanced technology being used every where, the cost of hospitalisation and treatments are so high that , it’s almost beyond the reach of common man.

You need not expect your children to look after you just because, they are going to live in an even more competitive , stressful and faster world.

So it becomes quite essential for today’s generation to invest for their future needs. Mere savings from job may not be enough. You have to create wealth by investing. Simply put- while your work hard for more money, you money too should work for you!

Investing is not something which only wealthy people can do. Investing is possible for all classes of people. For this, irrespective of your income levels , you need a proper financial plan. You need not have big funds to start investing. even if you invest small amounts regularly, you will be able to achieve all your goals. The starting point is – you should decide where you will invest and how long.  To choose wisely, you need to know the investment options thoroughly and their relative risk exposures.

That’s the importance of investing. Investing is the best way to secure your future.

PLAN AND INVEST

The key to wealth is to plan and invest. Your job is only half done when you save money. That money has to be invested in wealth creating assets in prudent ways.  As a first step, you have to clearly define your short term and long term financial targets. Once you have a clear idea about your financial goals, the next step would be to draw a clear road map to reach your target. However, readers should not think that financial planning is all about creating wealth. Financial planning, in fact, is a very broad term and Investing is only a part of your financial plan. A proper financial planning can be done only if you can clearly chart out your strengths , your goals and your capacity to take risk.

Later on, we will discuss what financial planning is all about and the advantages of having a definite plan.Right now ,our next chapters would explain more helpful topics like when should you start investing and The right mind set for investing.

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