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PLAN YOUR INVESTMENT WISELY
INVESTMENT - BASICS
1. Savings by way of excess of income over expenditure is a source of investment . Savings also represent sacrifice of today's pleasures for the sake of tomorrow.
2. Borrowed funds also can be used for investment purpose.
3. While investing , we spend our savings for purchasing items with a hope of reselling the same for profit and expecting returns, in the form of interest , dividend or rent , in between .
4. There are inherent risks in every type of investment . Even holding cash has a risk of theft .
5. While investing , one has to study risks and rewards of various investing avenues available and decide what type of risks one is ready to take against what return .
6. While investing our savings , loss may erode our savings . In investing of borrowed funds , we will have additional burden of repayment with interest .
7. There are investment options available with Fixed Earning , variable earning and no guarantee of any earning . Investment options also have guaranteed return of principal invested and no guarantee on the principal .
8. Fixed Income investment options are Deposits with banks & corporates , PPF , NSC etc . Normally such investments are considered as Low risk Investments .
9 . Variable income investment options are Debt mutual funds , Principal guaranteed mutual funds etc .
10 . Investment in Stocks , equity mutual funds , real estate , gold etc do not carry any guarantee of income & principal . Hence they are treated as High Risk investment .
11. Even low risk investments do not cover us during inflation .Purchasing price of our investment would have gone down .
12. It is better not to put all eggs in one basket . Diversify your investment .
2. Borrowed funds also can be used for investment purpose.
3. While investing , we spend our savings for purchasing items with a hope of reselling the same for profit and expecting returns, in the form of interest , dividend or rent , in between .
4. There are inherent risks in every type of investment . Even holding cash has a risk of theft .
5. While investing , one has to study risks and rewards of various investing avenues available and decide what type of risks one is ready to take against what return .
6. While investing our savings , loss may erode our savings . In investing of borrowed funds , we will have additional burden of repayment with interest .
7. There are investment options available with Fixed Earning , variable earning and no guarantee of any earning . Investment options also have guaranteed return of principal invested and no guarantee on the principal .
8. Fixed Income investment options are Deposits with banks & corporates , PPF , NSC etc . Normally such investments are considered as Low risk Investments .
9 . Variable income investment options are Debt mutual funds , Principal guaranteed mutual funds etc .
10 . Investment in Stocks , equity mutual funds , real estate , gold etc do not carry any guarantee of income & principal . Hence they are treated as High Risk investment .
11. Even low risk investments do not cover us during inflation .Purchasing price of our investment would have gone down .
12. It is better not to put all eggs in one basket . Diversify your investment .
INVESTMENT GOALS
Before handing over our hard earned money in to an investment , it is better to set a goal for our investment . Goal can be set for a time period , return or happening of a certain event . For example , young person may like to invest for 5 years in a recurring deposit with a bank to accumulate margin for his housing loan for buying a house at the end of 5 years . After purchase , he can have indefinite time period of his entire life for his investment in the house he is going to live . An young person may invest for just 5 years to cover his/ her marriage expenses expected to happen in 5 years . Another may like to invest till his retirement date for a peaceful retired life . Another may invest in stock market till his investment grows to a billion or he loses 50 % of his investment . .Goals are different , time periods are different .
Same person may have different goals and he would like to invest in various instruments according to his goals.Whatever may be the goal , better to note down and work out a road map for the investment . Better to make a plan for one's investments .
Same person may have different goals and he would like to invest in various instruments according to his goals.Whatever may be the goal , better to note down and work out a road map for the investment . Better to make a plan for one's investments .
RISKS IN AN INVESTMENT
Risk in investment is just probability of loss . Every investment has its own unique risk matrix attached to it .
Some common risks involved in investing are:
Some common risks involved in investing are:
- Interest rate risk: When interest rates rise after you lock in your money, meaning you don't earn as much on your money as you would have if you'd invested at the higher rate For example Fixed Income investments .
- Inflation risk: Your investment doesn't earn enough to keep up with inflation Again it can happen for Fixed Income investments .
- Liquidity risk: There might not be buyers interested in your investment when you want to sell. For example Real estate . stocks
- Credit risk: The organisation may not be able to repay its debts, and you might lose your money. For example , Corporate Deposits
- Market risk : Prices of the commodities / instruments may fall after your purchase Example Gold , Real estate , Equity .
- Currency risk: Your investment is affected by changes in the value of the currency in which investment is made . ; Investments made overseas .
RISK AFFORDABILITY
Before making any investment , one should ask himself how much loss he is ready to bear in the transaction . We have our savings and have set our goals for investments .What are the risks involved in the transaction ? If risks materialist , how much we may lose ? What can be done to mitigate the risks ?Then how much we are ready to lose if some things go against our investment ?. Whether loss would affect our present day life style ? What will happen to our goals ? Losing what amount will make us lose our sleep or our health ? After answering all these questions ,one should make up one's mind whether he is going to have the transaction or go for an alternative transaction involving lesser risks .If he decides to go ahead with the transaction , he should take steps for mitigation of risks and stop loss for the transaction .
RISK PERCEPTION
Risk perception of various categories of investments are given below in the table . Matrix is general view based on past experience .However risk perception also changes on the basis of credit ratings of originators of the investment
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REWARDS FOR AN INVESTMENT
The rewards vary according to nature of investments . Some reward with regular payments and some only at the time of their disinvestment . While choosing an investment , one should consider the kind of reward he expects from such an investment and whether the reward is suffice for his purpose of investment . Here is a list of rewards for some of the investments : :
1. Interest Income in case of Bank Deposits , Corporate Deposits .
2. Interest and Tax savings in case of PPF , NSC
3. Risk mitigation and tax savings in case of General insurance
4. Risk mitigation & Tax savings , Dividends / Bonus in case of Life Insurance .
5. Dividends during the period of holding and Profit on sale for Equities .
6. Dividends & or Profits for Mutual funds
7. Profit at the time of sale for Gold
8 . Rental income / savings on rentals for investment in housing and Profit at the time of sale
There are different types of life insurance policies and mutual funds and rewards vary .
1. Interest Income in case of Bank Deposits , Corporate Deposits .
2. Interest and Tax savings in case of PPF , NSC
3. Risk mitigation and tax savings in case of General insurance
4. Risk mitigation & Tax savings , Dividends / Bonus in case of Life Insurance .
5. Dividends during the period of holding and Profit on sale for Equities .
6. Dividends & or Profits for Mutual funds
7. Profit at the time of sale for Gold
8 . Rental income / savings on rentals for investment in housing and Profit at the time of sale
There are different types of life insurance policies and mutual funds and rewards vary .
RISKS OF INVESTMENTS OUT OF BORROWED FUNDS
While we invest our own surplus funds , we carry the risks of loss of capital and interest loss . If we make investment out of borrowed funds , we will have additional burden of interest cost of borrowed funds and repayment of such borrowed funds with in the period agreed up on . The investment will become profitable only when it covers our interest cost . Even if the investment prices become static , investor will lose . Further as and when repayment of loan becomes due , one has to liquidate his investment even at a loss .
However there are exceptions when an investor has separate income flow to cater to the repayment of borrowed funds and does not rely on the income / sale of investments . Examples are Housing loans and car loans . Housing loan / car loans would be paid out of personal income like salary , business profit and the value of purchased house does not matter . In car loans , it is expected that car would depreciate over the period and repayment solely relied up on personal income .
However there are exceptions when an investor has separate income flow to cater to the repayment of borrowed funds and does not rely on the income / sale of investments . Examples are Housing loans and car loans . Housing loan / car loans would be paid out of personal income like salary , business profit and the value of purchased house does not matter . In car loans , it is expected that car would depreciate over the period and repayment solely relied up on personal income .
INVESTMENT DECISIONS
While making a decision on investment , one has to consider following aspects :
Once investment decision is made , again one needs to go back to the risks of the channel and take appropriate risk mitigation actions . For example Investment in housing needs insurance and investment in physical gold needs safe deposits lockers .
Investment in stocks need stop - loss levels
- Amount fund that can be set aside for investment
- Purpose of investment
- alternate investment channels available
- risks and rewards of each channel
- Final selection .
Once investment decision is made , again one needs to go back to the risks of the channel and take appropriate risk mitigation actions . For example Investment in housing needs insurance and investment in physical gold needs safe deposits lockers .
Investment in stocks need stop - loss levels
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