When & Where to start investing — Part 1
For any endeavour to be successful, there should be a solid goal statement.
As Seneca puts it, ‘there is no favourable wind for the sailor, who doesn’t know where to go!’
Thus, Goal based investing would help you navigate the world of savings instruments in an efficient manner. Goals in turn, can be short term or long term.
Need for investment
Goals aside,
One might wonder, why should I be bothered to invest & instead be a content person with cash in hand or banks to the least?
The answer is Inflation.
The purchasing power of rupee (or any currency for that matter) depreciates with time, invariably. In India, the monetary policy of the government aims to keep the inflation within 6%(on paper). If the policy materialises, 1 year down the line — the worth of your 1L in hand would be 94k at a nominal 6% inflation rate. Thus investments aid you in negating such erosive effects of the economy.
Hence investment is imperative to protect your capital as well as beat the inflation.
Now, how do you pick between various investment options available — Financial assets and Physical assests such as Real estate and Gold?
These financial assets could further be categorized as:
a) Fixed income investment (Fixed Rate of interest is offered) b) Equity linked investment (Variable Rate of interest based on market performance)
Before doing the selection, let’s have a look at how India Inc. invests. From the below summary, it is clear as day that it is traditionally skewed towards financial assets. Within financial assets, Fixed income instruments constitute the major portion of the bucket.
While financial goal statement helps you to navigate the investment options in a prudent manner, the risk vs reward trade-off apply necessary constraints on your goal so as to make it grounded in reality. It would also assist you in appreciating the best case and worst case scenarios, that could play out in any economy.
Risk vs Reward
Based on your investment needs, the savings instrument that is available in the market could be weighed based on these 3 key features.
a) Capital protection b) Expected ROI c) Liquidity
Capital Protection
The amount that you are investing needs to be protected, to the least — unlike gambling where your money is 100% volatile. This is where FDs, PPFs, VPFs, Bonds stand to perform better than equity linked instruments such as Mutual funds.
This brings us to the discussion of ‘risk apetite’.
Expected ROI
ROI stands for Return on investment. As of August 2022, Bank FDs offer around 6% or higher on your long term investment. With repo rate increase by RBI, you can expect this to increase to 8% — for an absolutely optimistic scenario.
When it comes to banks or PPFs and sorts, the returns are ‘assured’ in nature, whereas equity instruments do not come with such a promise.
Liquidity
Of all the investment avenues, the liquidity quotient is the least with Real estate — though, they offer the lucrative returns of the lot. Apart from that, most of the investments can be liquidified based on your need — although not advisable.
Some of the safe avenues such as PPF and equity linked instruments (such as ELSS schemes) have a certain lock-in period, before which money could not be withdrawn.
These 3 features can be summarized through the Risk-Reward chart below.
More the risk, more you would be rewarded with.
Note: For the sake of simplicity, Debt Funds and Equity Mutual funds are placed at the same level. Thoughthe ROI offered by Debt MFs, Bonds and NCDs are anywhere between what Equity MFs and Fixed Deposits would offer.
This article is aimed at priming you for investing and the very need for investing — besides acknowledging the risk quotient involved.
In the following articles, we shall discuss the various savings instruments available in the market and their interest rates, a deep dive into Mutual funds and how a mutual fund portfolio could be built.