What are the stages in investment process?

There are 4 stages –

  1. Investment style / policy
  2. Investment analysis
  3. Valuation process
  4. Right mix of investments

INVESTMENT STYLE / POLICY

This stage involves taking decisions. It involves finding answers to the following questions.

  • What’s the risk you’re willing to take? Risk and returns are closely related. The more risk you’re willing to take, the more returns you’d expect. Where do you stand – are you a moderate risk taker or a heavy gambler? Or are you a really risk averse person?
  • How much money can you set aside to invest?
  • With the money you have, what are the assets in which you can invest?
  • How much time can you wait for your investments to grow?
  • What are your financial objectives? Do you think that you will be able to achieve your objectives with the money you have decided to invest? If yes, have you arrived at that decision by calculating the returns at a reasonable rate?
  • If your answer to the above question is ‘no’, how would you strike a balance? Will you bring down your financial goals by cutting off certain goals or would you try to increase your investable fund?
  • If you decide to invest in different assets like shares, real estate, gold etc.. How much are you willing to allocate to each type of assets and why?
  • Would you like your investments to be actively managed? That is, would you like to utilize the services of investments experts who would do their best to extract maximum gains for you using their expertise and experience? Are you willing to pay for their services?
  • If you’ve decided to take the stock market route, would you adopt a growth investment strategy or a value investing strategy? Or would you try to strike a balance in between ? Whatever may be the style you adopt , would you prefer to invest in a mix  large caps , mid caps and small caps or would you like to stick with one category?

Finding answers to the above questions would reveal your preferred investment style.

INVESTMENT ANALYSIS

A Comparative analysis of your chosen mix of investments. This would help you to decide whether the mix is optimal to achieve your goals.

  • At the base level it includes the analysis of your chosen investment asset – equity, debentures, bonds, commodities, real estate etc..
  • Broader level analysis would include analysis of the economy and industry, qualitative and historical analysis.

INVESTMENT VALUATION

This is the most important part of investment. Valuation is the process of estimating what the assets is actually worth. Valuation can be done for all assets. It is an attempt to determine the ‘reasonable price’ at which an asset can be bought so that it increases in value over a period of time. It is quite different from the ‘market price’ which is what a willing and able buyer is prepared to pay.

For example – if a builder offers an apartment for 65 lakhs, would you blindly buy it without analysing the builder’s track record and the facilities offered? Won’t you try to find out why he charges 65 lakhs for that apartment? Finally you would buy that apartment only if you find it attractive at that price. It is an individual decision after considering all the factors.

The same process needs to be done in any form of investment – whether it’s shares or mutual funds or commodities. You have to make sure that the asset you get is worth the money you spend.

RIGHT MIX OF INVESTMENTS

Putting all the eggs in one basket is not a good idea. There are some people who think that putting it all in one is better since they can concentrate on it and escape from the trouble of carrying multiple baskets at the same time. That’s a very wrong approach in investments and it needs to be corrected.

For example – if you put your money in real estate alone, should the real estate prices crash- as we saw 3 years back, you’re locked up with no other options. Instead, if you had your money diversified in stocks, gold, real estate etc you’d be better off since when your money goes down  in some, you gain in another and thereby reduce the risk of losing all your money.

Deciding the right mix is technically called ‘portfolio’ and managing it to achieve maximum results- in terms of risk reduction, capital preservation and returns is called ‘portfolio management’.

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What care should one take while investing?

Before deciding about any investment, there are a lot of things one should be careful about. This includes:

COPIES OF DOCUMENTS

Any investment scheme will have a written document which explains the offer. It’s important that you ask for those documents and keep it in a file with you. Investment advisors and sales person work on a target basis and they work under lot of pressure from the management. Obviously, these people would explain details in a way that the scheme is attractive to you. It’s part of their duty to present it well and attract customers. They are trained to do that.  Many of those offers may be subject to lot of terms and conditions. Finally, when you find a mismatch with what was said by the sales person and what’s happening the investment scheme, the company will ask for written proofs!!

So always insist on obtaining a copy of any document you sign.

READ, UNDERSTAND AND THEN SIGN IT.

Some people do collect all the information in written form, but they fail to read the lines carefully. In any investment broacher or document, the negative factors or unfavorable terms and conditions will be written in the smallest of letters possible!!

VERIFY THE LEGITIMACY

Investment scams have become very common these days. People invest in schemes that are received through email or phone calls or representatives who lure them to invest in a product or property or forex. Before investing consult a financial advisor or an advocate and verify if the legitimacy of the company that’s promoting the scheme and also if such schemes are allowed to be operated. Also note -

  • The licenses or permit granted and the Act or Law under which the scheme is allowed to operate.
  • The truthfulness of testimonials and references they present.
  • Details of head office, branch offices etc. If possible try to visit the office. Most fraud schemes are very confident about the results but fall short when it comes to details.
  • Remember that existence of Websites and phone numbers are not proofs for the legitimate existence of a company or scheme.
  • In India, any investment scheme should have government’s approval. Approval would be in the form of licenses or registration numbers.
  • The constitution of the business as a company under the companies Act, ISO certifications, testimonials from high officials etc does not guarantee that the scheme operated by the company is legal.
  • Never pay cash. Always pay by cheque and get a receipt for the same. Cheques paid should be a crossed  account payee cheque in favour of the the company or scheme name.

DO A COST BENEFIT ANALYSIS

The costs should justify the benefits. Some investments carry a lot of hidden charges. It’s hidden in the sense that, those charges will be disclosed in the offer document in such a way that you get confused about the way in which those charges would be applied.

ASSESS THE RISK OF INVESTMENT

The thumb rule is- higher the return, higher the risk. There is no such thing called low risk-high return investment. All investment carry risk and the degree of risk increases as the expected rate of return increases.

KNOW THE LIQUIDITY AND SAFETY ASPECTS

Your investment should be liquid, ie, it should be convertible into cash quickly. Also evaluate the after tax return on investments.  Most of the investment schemes talk about returns before tax.

COMPARE

At any point of time, you‘ll have many investment opportunities in front of you. List out your objectives and financial goals first. Then, analyze whether those investments would help to meet your financial goals. Also compare it with similar investment schemes offered by other companies.

DEAL THROUGH AUTHORIZED INTERMEDIARIES

Most of the investment companies use the help of intermediaries to generate business. For example- mutual funds are sold through AMFI certified agents. Make sure that the agent that represents that company is qualified to do so. Ask all the clarifications you need to the intermediary.

SEARCH THE WEB

The internet is full of information about any topic you need. Search the net before you talk to the representative. The net will contain reviews by experts on investment schemes. Read at least 3 or 4 reviews. Since these are written by people who are already experienced, it would benefit you a lot.

WHAT IF SOMETHING GOES WRONG?

Explore the options available to you if something were to go wrong; Is there a regulatory body who would address your grievances? Do they have a local office in your state? After all this,  if you are satisfied, make the investment.

What’s said above is the minimum level of understanding you should have before embarking on an investment. Take care !

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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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