Inventment in Debt

we read in the last article about investing in Equity, but not all want to take the risk. In such cases debt is a good option. The advantages of investing in debt is principal is safe, return are more or less assured and you do not need to do much research. As it is very well regulated, just like equity. The options available are plenty, which could lead to confusion.  So with so many options what should we look for? Here are some pointers to consider. Check from the tax angle is the interest received taxable? If yes, what would be the tax impact?

As you are aware Interest is taxable under income from other sources. Also when you receive the investment back (if more than a year) it is treated as capital gain. Check if the returns meet your cashflow requirements. As with many options, returns could be monthly, quarterly, half yearly, etc. So check it out and try to get the maximum returns with all the options given above. Though I mentioned that the principle is safe, there is a risk that the company or the bank would go into a bad financial phase, wherein your money could get blocked or even lost.

Some of the most common debt instruments are fixed deposits (bank and company), PPF and government bonds. We should also put debentures into this category, but we need to look at the type of debenture to decide. As some debentures give good returns, we need to look at the credit ratings of such debentures, before investing. All financial advisors would say that some portion of your portfolio should be in debt, this is just to take care of the risk of investing. When you are younger, the proportion of debt in your portfolio can be lower, but as you grow older, this proportion should increase.

This is because your risk taking ability reduces as well as your earning capacity. It there is a fall in the market, usually the impact on debt is low or nil, depending on the debt instruments you have invested in. However remember, debt investment usually does not beat inflation, in fact it is observed that it erodes the value of your investment. While investing it debt look at the lockin period of your investment. Unlike equity, where you can sell and get out of an investment whenever you want. In case of debt usually the period is fixed. Example is, in case of PPF your locking would be 15 years.

As we had mentioned earlier if you invest in debt risks are lower or nil, now a days some new types of investments have come called fixed maturity plans. These are funds promoted my mutual funds, which invest in the debt market. It is observed that usually these funds give a good return, but it is not guaranteed.

Anyways, all said and done, if you are risk averse, debt is the way to go.

Investment in Equity

21000 or 22000 that is the number everyone is talking about, but what is it. It is where all the analyst are saying the Sensex would touch. So if it touches this magic number means it is going up. Yes by the simple logic, if something is at 20000 and reaches 21000, it is going up. So if I invest in the sensex 20000 today and I sell when it reaches 21000, I will make 1000. But I cannot invest in the sensex unless I invest in a sensex mutual fund. I want to invest in equity directly, what should I do?

Do I invest today or wait till it falls more, so that I can make more money. Going by the current environment if I am not careful, I could lose heavily. So if you have not invested in equity earlier, you need to be careful. Most of the time, I have seen, when people invest for the first time in equity, they just invest based on reading in the newspaper, magazine or listening to a friend or relative or now the latest fad TV. It’s better to do your homework. Since this is your first time in equity, you need to tread with caution.

Investing in equity is similar to gambling, but this is more of authorized gambling. You would have a heard of many persons making a fortune in equity Warren Buffet is one of them. But you would have also heard of many of them losing money as well and you would not like to be one of them. Many have made a lot of money in a short span of time, some to longer. You may call it luck, but the one who made the money would call it educated investment and timing. Anyways you have decided that this is the best option, so what do you do?

First of all, you need to open a trading and demat account. You cannot do any investment in the market without a demat account. What do you do next? Instead of what to do next, let’s see what not to do. As it is your first time, do not buy in large quantities, I’m sure you do not want to lose too much money till you start understanding how the market works. Don’t try to do bottom fishing, i.e. trying to enter the market when the price is low. It is never the right time. Even the best of professionals have not been able to time the market.

Do your study and buy a stock which you very strongly feel would do well. Do not go by tips, most of the time tips are leaked by persons who are trying to get out of a particular stock. Last of what not to do, is sell in panic. There would be many times when the whole market falls, whenever the whole market falls, your stock would also fall, so wait for the market to recover. If you have done your study and you are sure of the stock, stick to it, unless your study shows some fundamental change.

Don’t try to enter and exit the market at a fast pace, that is for professional gamblers, whom we all call day traders. This is a whole time activity. All day traders do not consistently make money. There are ups and downs in everything we do. If you invest in equity, do it for the long term. Long term in equity always gives good returns. Studies have shown that the stock market is the only market all over the world which has always grown and its returns are always better than inflation. Some time back I said trading in equity is gambling and as you were reading you agreed, but then why are we still suggesting investing in equity.

As I mentioned if invested properly equity investments can give you good returns, yes you could lose money as well. But equity investment is not for the light hearted, you should be able to take the hit. As it is said, high risk gives high returns. There will be times when you would lose money and you should be able to take that into your stride. The first year will be your learning period. As you start investing and tracking your investments, you will start getting more insights of the complicated market and the number of factors you need to look at.

As I said there will be times you would lose money and sometimes you would make money. But as you start tracking you will learn a lots, let’s give you a start. As we said invest in a stock which you feel strongly about. But what do you look for in that stock. Ensure that the stocks Year on profit is not going down, profits might be good, but also check that there are operating profits as well. Initially go for stocks which are part of the index. These are just some tips. Rest is just study and invest.

Enjoy investing in Equity.

Making the right assumptions

When we start investing for our future we make certain assumptions and then arrive at an amount to be invested to achieve the financial goal. Even if one of the assumptions is wrong, our whole planning would go for a toss. Hence it is very important the we arrive at the right assumptions. What are these assumptions? The assumptions would be

Future costs

How do you arrive at the future costs? Well you are right; first take the current cost into account. Then take into account increase in cost, depending on the number of years into the future you would be looking at. To arrive at increase in cost, we would have to look at inflation rate. Inflation rate is the rate at which the costs are rising, this can be easily got. Depending on the time horizon, it is always better to be conservative. So if you are looking for costs 7 years from now, first find out what was the inflation rate for the past 7 years and take the worst rate i.e. the highest rate.

So even if the inflation rate has not been bad you will be safe, but if the inflation rate increases at anytime beyond what you have assumed, you will have to reassess your future costs take the new costs and inflation rate for the remaining period.  The other part which most of us miss if forex rates. This is for those who have to arrive at future costs in a foreign currency. We should use the same method as we had done earlier for inflation. Find out from the past what was the worst exchange rate and apply it. If the rate goes beyond that, recalculate.

Investment

Once we arrived at the costs, we need to start saving, but how much do we save, is it total future costs divide by the number of months left to arrive? No, as whatever you invest you would be getting a return on it. So you should invest in such a way as you would get the maximum return. This way, you will have to save less or should I say suffer less, since for every extra rupee you have to save, you will have to cut your budget somewhere else. So taking the time horizon, you can decide on the type of investment.

If you have assured rate of return for the investment horizon, your calculation becomes easy. If not you would have to check the past for getting the estimated rate of return and here too, it’s best to be conservative. Another option is go for 2 or 3 different types of investment, this way, you diversify your risks. But this is best when the amount required is high. When you invest you get returns, please do not take absolute returns but post tax returns or else depending on the tax slab you are in, you would end up short to that extend.

Other goals

As you have done the planning for one goal, you also need to plan for your other goal. Else you would have the money but not be able to use it for that goal as some other goal becomes important. So taking the life stages of all members of the family you should do your planning for all the goals. Yes, it is a cumbersome exercise, but then it’s worth it. During your planning if you think, that you have to cut too many corners, have a relook at your goals and see if you really need those goals or some of those can be skipped.

Yes, some of the goals can be skipped; it might not be worth having a goal of visiting USA for which you have to like a paupers life for next 10 years.

Future Income

We made our plans and arrived at a figure to be invested every month to be invested, but for that you should have the money in hand. So while planning, take into account your future sources of income and expenses. What would happen if you do not get the expected rise in salary and to add to it cost would keep going up because of inflation? So take into account the expected net saving in the coming years after considering potential income and rising expenditure.