Understand your long-term needs and allocate money, choose investment vehicle accordingly.
Doing repetitive things can get boring. So it seems with investing, too, which could be why investors keep asking for new avenues to invest. If we suggest some mutual fund schemes to investor, he/she says, I have already invested in that fund house, little knowing we may be suggesting some entirely different scheme from that fund house.
Also, there is a perception that investing in mutual funds is for the short-term, whereas investing in properties is for the long-term. The perception is, of course, entirely erroneous. Mutual funds are treated as a short-term investment probably because they are quoted and their prices are known on a day-to-day basis. Also may be because selling fund schemes is very easy. The taxation for equity mutual funds is benign — long-term capital gains after 12 months of investment is zero.
Equity is treated as an even shorter term investment. It is more often treated as a speculative investment, instead of the actual long-term asset it can be and should be in a portfolio. Due to such wrong perceptions, many people resort to day trading in equities. Many others keep buying and selling in the very short span of tim e, usually calculated in days and weeks, instead of years.
| THINK BEFORE YOU INVEST |
| * Have a goal and invest to meet the same |
| * Prioritise your goals according to the money required for it and time frame |
| * Safer instruments not be apt for all goals; opt for them nearer to the goal |
| * Equities and related instruments are for long-term |
| * Mutual funds, stocks can give 12-15 per cent yearly; higher than FDs, PPF |
However, mutual funds and equities are growth assets that could give good returns, over time. Those who have invested and stayed the course will vouch for it. The Sensex has given an 18 per cent compounded annual growth rate (CAGR) since 1979, which is creditable. That is indicative of the kind of returns this asset class can deliver. The perception continues in spite of knowing these statistics. Fixed deposits, bonds, Public Provident Fund (PPF), and the likes, are investments of choice among people, due to the fact that investors want to put their money where there is least risk. But there is a risk in that, too, the risk of money depreciating in real terms, considering tax and inflation.
CLOSER LOOK
Individuals chase the latest fads in their quest for new avenues to invest money. Property and gold are the latest to catch their fancy. There are many who tell me that property prices cannot go down in Mumbai. I am not so sure, for one. Their outlook is coloured by the relentless rise in property prices in the past six years or so (with a dip in 2008-09 ). But, the steep appreciations which has happened will most probably not happen in future. It is likely to settle in its long-term average of six to nine per cent yearly growth.
Those who buy property for investment, expecting major appreciation, would be disappointed. Property also offers low rental potential of about three to four per cent of the property value, for residential ones.
Commercial properties is much better, between 6 to 12 per cent of the property value. Hence, investing in properties should be tempered with this understanding, rather than based on the exuberance of the past few years.
Gold as an asset class has been in existence for a very long time. In the past 10 years, it has done well. The long-term performance is not as good, at eight-plus per cent CAGR for a 20-year period.
Gold performance depends on several factors. It moves up when there is uncertainty in the environment and when the dollar depreciates. Gold is seen as a storehouse of value and an asset of the last resort (whether it actually is can be validated only in such a scenario). Gold does not have any real use other than ornamentation. It is also a speculative asset, as one will not be able to get any regular returns on it, unlike in the case of equity shares, fixed deposits or properties. So, the primary reason for buying gold is in the expectation of appreciation in their prices.
Any asset bought with the only expectation of a future price rise and not other payout is speculative. Land investment also falls in this class.
STARTING POINT
Investors need to understand one fundamental fact. Whatever they invest in needs to meet their goals. Goals have to be prioritised. A retirement planning should be high on priority and a foreign holiday may be a low to medium on the priority list.
A goal also needs to have a time frame. For instance, you may require Rs 25 lakh after 10 years for your child’s education. Something like buying a car may be more immediate, like a year from now. Whether the goal is short, medium or long-term has a major bearing on how one should save for it. Apart from this, you should also need to calculate the amount of money that would be required to fulfill your goal on time. Many neglect this, but this is also extremely important.
After paying heed to these important points you also needs to consider the number of years you have befor you retire, the dependents in the family, whether it is a single income or multiple income family and health condition of family members. Based on that, investments need to be made to meet short-, medium- and long-term goals. Based on the number of years to retirement, the aggressiveness of the portfolio is decided.
Say you have ten years or more to retire, your portfolio can be aggressive. That is you can save through riskier instruments. Depending on your needs for upcoming goals, you could invest up to 75 per cent of your money in growth assets like equity or related instruments. Nearer the goal, higher amounts need to be put in safe or debt instruments. This is to ensure you will have enough money for the upcoming goal.
There needs to be an over-arching strategy while investing. One needs to know what and where the goal posts are while putting together the investments. Also, the focus should be on regular investments with a long-term orientation, instead of trying to ride the crest of the latest hot-selling product. In short, responsible investing.
The writer is a certified financial planner
