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INVESTMENTS 
"An investment in knowledge pays the best interest."   Benjamin Franklin

FIXED INCOME   MUTUAL FUNDS   STOCKS                

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   .

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 .  

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:

• 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 . 

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 . 

INVESTMENT DECISIONS

While making   a decision  on investment , one has to consider following aspects :

• 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 

PRECAUTIONS WHILE  INVESTING  CLICK HERE TO READ 

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