Having figured out the reasons to invest in the last blog , the next obvious question would be – Where would one invest, and what are the returns one could expect by investing.
When it comes to investing one has to choose an asset class that suits the individual’s risk and return temperament.
An asset class is a category of investment with particular risk and return characteristics. The following are some of the popular assets class…
1. Fixed income instruments
2. Equity
3. Real estate
4. Commodities (precious metals)
Fixed Income Instruments :
These are investable instruments with very limited risk to the principle and the return is paid as an interest to the investor based on the particular fixed income instrument. The interest paid, could be quarterly, semi-annual or annual intervals.At the end of the term of deposit, (also known as maturity period) the capital is returned to the investor.
Typical fixed income investment includes:
1. Fixed deposits offered by banks
2. Bonds issued by the Government of India
3. Bonds issued by Government related agencies such as HUDCO, NHAI etc
4. Bonds issued by corporates
Equity :
Investment in Equities involves buying shares of publicly listed companies. The shares are traded both on the Bombay Stock Exchange (BSE), and the National Stock Exchange (NSE).
When an investor invests in equity, unlike a fixed income instrument there is no capital guarantee. However as a trade off, the returns from equity investment can be extremely attractive. Indian Equities have generated returns close to 14% – 15% CAGR (compound annual growth rate) over the past 15 years.
Investing in some of the best and well run Indian companies has yielded over 20% CAGR in the long term. Identifying such investments opportunities requires skill, hard work and patience.
You may also be interested to know that the returns generated over a long term period (above 365 days, also called long term capital gain) are completely exempted from personal income tax. This is an added attraction to investing in equities.
Real Estate :
Real Estate investment involves transacting (buying and selling) commercial and
non commercial land. Typical examples would include transacting in sites, apartments and commercial buildings. There are two sources of income from real estate investments namely – Rental income, and Capital appreciation of the investment amount.
The transaction procedure can be quite complex involving legal verification of documents. The cash outlay in real estate investment is usually quite large. There is no official metric to measure the returns generated by real estate, hence it would be hard to comment on this.
Commodity – Bullion :
Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver over a long-term period has appreciated in value. Investments in these metals have yielded a CAGR return of approximately 8% over the last 20 years. There are several ways to invest in gold and silver. One can choose to invest in the form of jewelry or Exchange Traded Funds (ETF).
A note on investments :
Investments optimally should have a strong mix of all asset classes. It is smart to diversify your investment among the various asset classes. The technique of allocating money across assets classes is termed as ‘Asset Allocation’.
For instance, a young professional may be able take a higher amount of risk given his age and years of investment available to him. Typically investor should allocate around 70% of his investable amount in Equity, 20% in Precious metals, and the rest in Fixed income investments.
Alongside the same rationale, a retired person could invest 80 percent of his saving in fixed income, 10 percent in equity markets and a 10 percent in precious metals. The ratio in which one allocates investments across asset classes is dependent on the risk appetite of the investor.
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