One of the reasons why people tend to shy away from investments is that there are a number of options and it is quite confusing. The barrage of promotional messages about various investment options doesn’t help either; in fact, it ends up confusing the potential investor, especially if a person is new to investing. New recruits in a job will do well to start early in life with their investment plans. It always helps later in life.
The two basic maxims in investing are:
Risk and reward are directly connected : Higher the return, higher the risk. The only way to mitigate or minimise risk is through a thorough understanding of the investment details and by spreading your money across various options.
Terms and conditions apply : Every investment option comes with terms and conditions, which are signed on to signify acceptance and acknowledgement of the same. If the investor claims he did not read it but just signed, it is not legally valid and the investor can only blame his/her own laziness or stupidity. As mentioned in the earlier column, It’s your money — you take care of it , no one else is going to take care of your funds better than you. If you are casual, others will be even more casual about your investments.
Investment options
Keeping the above two maxims in mind, let me share an overview of investment options — from least risky/ minimal effort to maximum risk, returns and efforts.
Deposits with banks : The safest option is bank deposits. These could be fixed deposits or recurring deposits. As long as the bank is a reputed one, the money is relatively safe. Of course, the flip side is the return on such investments is among the lowest.
Deposits with companies: The next option is deposits with companies. These could be non-banking financial companies (NBFC) or large organisations. This is riskier than bank deposits, but gives slightly higher interest as returns. If you have checked out some basics about the organisation, such as its credit rating and credibility, there should be no problem.
Other deposit options : In the same category of deposits one can also choose from small savings options such as the post-office scheme, public provident fund, and so on. All these are safe and give average returns but, in many cases, have a lock-in period.
Stock markets : The other big plank for investment is that of stock markets. One can either choose to participate directly in the stocks market or invest in equities indirectly through mutual funds. Today, the choice of mutual funds spans various markets and is not limited to the stock market. You have funds which invest their corpus in debt instruments and commodities too.
Mutual funds : These are relatively safer investments, with better returns than deposits, for a variety of reasons, which include tax benefits. However, not all mutual funds are equal and, even among the options available, some perform better than others. A few do fail too, and end up losing money. The maxim of tracking your money is very important when investing in mutual funds.
Many investors tend to blindly follow the recommendations of their friends or financial advisers and then regret their decision. Before investing in mutual funds, one should first educate oneself about the various types of funds, their tax implications, and so on. Next, the investor needs to study the mutual funds available in the market and do some basic research with regard to their performance. It is better to choose a fund once you’re armed with such knowledge.
(To be concluded)
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