Its everyone dream, to be rich and wealthy but only a few manage to reach there. It is because we don’t have a systematic approach to be rich and we also have some misconceptions. Let’s discuss it all, over here to help ourselves to reach the goal.
One of the main misconception is, saving is investing for future, it is not true. Investing is saving however vice a versa is not true. Saving, in a literal meaning, is having money left over after all the expenditures. If a person is saving some bucks per month and keeping it in a savings account than the money is not growing. It is reducing, as there is a ruthless money eater called Inflation, which eats away all your money over the period of time.
Rule no. 1 Choose the right road: Always invest your money where the average return is higher than the average inflation rate.
A common man always struggles to select a decent investment plan which can help him grow rich. His desire would be always high but in a limited capacity. He spent all his life adjusting and compromising in many ways. While searching for a good investment plan, we may lose some decent investment plan and even lost the small amount accumulated during the waiting period.
Rule no. 2 Driving policy: Early small start with continual improvement.
Now as the road and its policy is clear, let’s focus on the vehicle i.e. where to invest? It is always a big question that where and how much a person must invest to attain certain goals????
Investment is a bit tricky and all can’t achieve their goals, if they are not acquiring certain knowledge of investment. Here we will learn few tricks and techniques that will help you in cracking the code of investment and achieving your goal. In a game of investment, each player must follow the process to attain certain level of success.
i. Goal
ii. Risk taking capability
iii. Investment options
Goals: It is a most difficult part for many of us, as we all know our dreams but we don’t have goals to achieve. We generally live our routine life having desires but don’t ask ourselves a Question: When and of what parameter we want to accomplish that desire? We must ask these questions and the answer to those are our goals. Some of the very common goals would look like – 7 days’ family (4 person) vacation trip to Singapore in year 2020 for an estimated expenditure of Rs. 2,00,000/- OR – Child’s higher education fund of Rs. 30,00,000/- by year 2038 OR – After retirement monthly income of Rs. 1,00,000 from Yr. 2025.
In-spite of desire goals, few essential goals are also to be achieved such as Emergency Fund – Ideally it should be the safest and most volatile fund and minimum amounting to 6 months’ monthly expenditure.
My personal favourite goal - To be independent at the age of 50 i.e. no need to work and do whatever I want to do such as gardening or writing the blog etc., for this the target amount would be my present Annual Expenditure X 20 (It is a factor to know the lump sum amount for financial independence).
Risk Appetite: We all are different and all have different priorities in our lives, similarly has different risk appetite. It totally depends on person to person and can’t compare with other. You should not start investing in a risky product just because all other in your surrounding are investing that particular scheme. You must identify the goals and set the risk appetite for them the most essential goals have to be the safest investment and the desire goals can be little riskier.
Still if you ask me to draw a risk structure for all, them it would be based on few Questions
Q.No.
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Question
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Mark 10
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Mark 5
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Mark 1
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How old are you?
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If around 20
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If around 40
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If around 60
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How much you earn? (Ratio = Net Monthly salary/ (age X 1000)
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If Ratio is greater than 3
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if ratio is 2
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if ratio is less than 1
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How reliable & safe is your present pay?
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If safest
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If moderate
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If highly risky
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How many members are presently dependent on You?
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none
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2
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More than 4
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Any Loan?
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none
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More than 20 Lakhs
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More than 40 Lakhs
|
The outcome of this exercise will tell your appetite for risk. Higher the number of outcome, Higher is the risk taking capability.
Investment options: In present world, multiple options are available for different type of investments, but clever selection of those is the key to success. It is advisable to have a list of investment options. Before investing into a particular option, various parameters must be ensured and few good rules to be followed. The key parameters for investing are Avg. ROI (Average Return on investment), Volatility, Risky, investment distribution, Monthly earning option, Expenses on investment, Future Prospects, Security and Fair price, let’s discuss them all one by one.
ROI: It tells us about the past performance of the investment plan that in last 10 years, what was the average return? It is need not to be mention that the higher the ROI, the better the investment option is….
Volatility: It tells about the block period of the invested fund. Low volatile funds (high block period funds) are mostly safe and yield higher returns but keeping all your investment into such fund is not advisable.
Risky: All the investment plans are risky, as the money is in some others hand and return is anticipated at the time of requirement/maturity. It is important to know the degree of risk involve in each investment option by visualising the variation of rates over a fixed time frame (i.e. difference between the least and the highest rate of return over the period of 10 yrs.). Higher the difference is higher the risk involved in the investment plan.
Investment Distribution: Investment distribution is totally dependent upon the risk appetite of an individual. How much you are able to take risk will guide you towards investing in riskier investment plan. For Eg.
If your Risk Appetite Score is 10 than ideal investment distribution would be 50:30:20 :: Risky:Moderate:Safe.
If the score is 5 than investment distribution would be 35:35:30 :: Risky:Moderate:Safe.
and If the score is 1 than investment distribution would be 10:40:50 :: Risky:Moderate:Safe.
These are only tentative distributions and may vary person to person and highly dependent on investors situation.
Monthly earning option: It is the best kind of investment to achieve financial independence. If an investment become the fixed income source than the goals are much easier and flexible. You must always invest in such a plan which gives fixed income but you must not be mistaken with dividend payable investment option, as they don’t have the advantage of growth and compounding.
Expenses on Investment: Expense on investment include the fee collected by the authority against their services and the Tax amount collected by Govt. against interest earned. You must be aware about the various fees charged against different investment plans and the rate of tax charged by the Government authorities and accordingly rate of return must be neutralized before comparing.
Security: You must know your worth and what your goal worth now, as it is important to have a backup plan to execute the goal in case of misfortune. Would it be ok for anyone to compromise a goal such as Children higher education fund of Rs. 20 Lacks in Yr. 2025, because the earning member of the family is no more today? So I highly recommend to have a term insurance plan of amount equal to your worth.
Future Prospects: In an investment plan, future aspect is an important parameter, as it will enable you to plan better. Does the option you have selected has an opportunity to grow further. In a bullish market, a hype is created for a particular sector and growth is anticipated based on the market speculations but the present rate could be much more than it deserves.
Fair Price: It is very important to buy the right thing at the right price. After identification of the investment option, a brief research must be conducted to identify the right price. In investment options such as FD, PPF etc. time does not matter as their price are not dynamic, however Stock linked investment option such as IPOs, Mutual Funds, NPS and infrastructure options has a dynamic pricing and vary rapidly over the period of time.
All the above mentioned parameters are important but each parameter has some weightage. The weightage shall be fixed by the investor depending on their level of understanding of each parameter. Now after discussing the key parameters, let’s discuss the major options of Investment and their performance against various key parameters. Few major Investment options in India are:
S.N
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Investment option
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Risk
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ROI
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Volatility
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Monthly Earning
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Expense/ Tax
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1
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Public Provident Fund (PPF)
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Safe
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Low
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Low
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NIL
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NIL
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2
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Saving scheme (Sukanya, RD)
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Safe
|
Low
|
Low
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NIL
|
TAX
|
3
|
Bank FD
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Safe
|
Low
|
Moderate
|
NIL
|
TAX
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4
|
Gold
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Safe
|
Low
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High
|
NIL
|
TAX
|
5
|
Insurance Investment Plans
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Safe
|
Low
|
Low
|
NIL
|
Charges & TAX
|
6
|
Company FD
|
Moderate
|
Moderate
|
Low
|
Bonus
|
TAX
|
7
|
Bonds
|
Moderate
|
Moderate
|
Low
|
NIL
|
TAX
|
8
|
National Pension Scheme
|
Moderate
|
Moderate
|
Low
|
Income
|
TAX
|
9
|
Mutual Fund
|
High
|
Moderate
|
Moderate
|
NIL
|
Charges & TAX
|
10
|
Stocks
|
High
|
High
|
High
|
Dividend
|
Charges & TAX
|
11
|
IPO
|
High
|
High
|
High
|
Dividend
|
Charges & TAX
|
12
|
Real estate – Housing
|
High
|
High
|
Moderate
|
Rent
|
Charges & TAX
|
13
|
Real estate – Plot/land
|
High
|
High
|
Moderate
|
NIL
|
Charges & TAX
|
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