NEWS
COLUMNISTS
STOCKS
MUTUAL FUNDS
TAX
INTERVIEW
REAL ESTATE
GOLD
CURRENCY

How to invest wisely

Murali Iyer

People from the salaried class have no escape from three realities of life -- taxes, retirement and death. While there is no escape from the third, one can still plan for the other two and try to minimise the likely accompanying pain.

Depending on specific financial needs, each individual has different objectives when it comes to savings and investments. Some of the factors that influence these decisions could be age, social status, income and risk profile. Moreover, an individual's investment needs may be short, medium or long-term, again depending on his or her outlook towards risk and rewards.

In any case, investment goals need to be clearly identified by the investor as it would help him/her decide what to target in the event of planning marriage, buying an asset, higher studies for children, or even planning her/his retirement. Irrespective of your appetite for taking risks, it is ultimately your investment horizon that will determine your returns.

How much time do you have?
The time horizon is also important as it plays a big role as far as specific goals of the investor are concerned. The potential for growth through investments in equities would be more if the time-horizon available for investment is higher.

The long-term investor who has the time-horizon, should ideally invest largely in equities to plan for his/her retirement, buying an asset, planning for the higher education of children and so on.

On the other hand, while planning for medium-term investments (like buying of a durable/electronic appliance for home or a vehicle, for instance) it is advisable to stay invested in debt for a larger portion of your net investible funds. Good debt instruments offer you the necessary interest cover, exit option, liquidity as well as security -- in short, a safe opportunity for the average risk taker. Yet another option for such an investor could be quasi-equity, aka mutual funds.

Coping with the bulls and bears
Equities generally offer you the best long-term growth in capital. For this, one should start investing early and regularly and more importantly, prudently. The power of compounding works wonders for investors.Keeping aside some amount of money regularly for long-term growth will aid that. Investments in the stock markets, though high-earning ones, could be fraught with risks if investors try and take advantage of fluctuations in the daily stock prices to make profits.

Any fall in the stock markets, like the 500-point crash witnessed two weeks back, could see investments reduced to zilch. Thus, if one is looking at long-term growth, investors are advised to invest regularly. When one invests for the long-term, it doesn't matter in which direction the market moves in the short-term -- up, down or nowhere. In the long run, if money is invested in growth-oriented and blue chip stocks, returns are sure to be reaped.

Picking good cherries
But identifying the stocks and the quantity to be bought can be directly proportional to an individual's age. The younger an individual, greater is her/his risk-taking ability. When one is in her/his youth or even in middle age, one has more time to ride the ups and downs of the stock markets. Turnaround cases, growth-oriented stocks and sometimes even speculative bets could form a large portion of your portfolio. As one gets closer to retirement, one generally feels like preserving one's assets and a large portion of your investments will go into blue chip investments and debt instruments.

How does one plan one's portfolio? The investor should ideally make an assessment of available options. A cent per cent exposure in either debt or equity investments will do no good for any investor. But a decision on the right mix should be on an individual's tolerance levels. If the crashing Sensex of two weeks back gives you the jitters, then one is advised to have a limited exposure to equity markets.

While debt instruments provide one with safe and regular returns, they do not have the potential to create wealth in the long-term. But equities could do just that. Hence, one is advised to create a portfolio with an appropriate mix of debt and equity investments.

A simple rule of thumb advised by professional fund managers is to subtract one's age from 100. The balance is the amount recommended to be put into equity-related investments. And the rest could be invested in income-related products. For example, I am 29 years old. This would mean that 71 per cent of my investible funds could be parked in equities while the remainder may be put in debt instruments like fixed deposits, bonds, debentures et al. On the other hand, my brother-in-law, who is 36, should be investing 64 per cent of his investible funds in equities and the rest in fixed income securities.

But as I have said earlier, equity investments could be very risky, given the nature of the stock markets. For investors not attached to the stock markets, keeping a track of what is going up and down could turn into a nerve wrecking, complicated proposition. Thus, leaving your hard-earned money in the hands of professional fund managers makes much more sense. Yes, I am advising investing into mutual funds, where research-based investments are done and the focus is on providing consistently higher returns to the investor without compromising on the safety of the portfolio.

Mutual admiration
Mutual funds like Birla, Alliance, Sun F&C, Reliance etc are examples of funds that have been consistently achieving high NAVs, resulting in high returns to investors. Additionally, when you invest in open-end funds, your money does not get locked in and you get to keep a track of your portfolio. Open-end funds are also as liquid as equities themselves.

While on mutual funds, irrespective of an investor's appetite for taking risks, it is ultimately one's investment horizon that would determine one's returns. Investors, irrespective of their age, could be of three types -- risk-averse, medium risk-taking and high-risk. These categories could be further broken down into those taking a long-term, medium-term and short-term view.

In the first category, an investor with a long-term view could park about 75 to 80 per cent of investible money in income funds while the rest could be put in equities. As the investment is for a longer period, an exposure in equities would fetch the returns while the emphasis on safety would remain.

For those with a medium-term view, the exposure to income funds should be increased to a higher degree, while risk-averse investors looking at the short-term are advised to park their entire investible surplus in debt funds.

Investors in the medium-risk category looking at the long-term could invest 60 to 65 per cent in pure equity funds while keeping the rest in debt funds. This is advisable as good equity funds could fetch better returns as compared to well-managed debt funds.

For those with a medium-term view, it is advisable to allocate equal portions to debt and equity funds or to invest the entire amount in a balanced fund that invests in equities as well as debt. But for those taking a call on the short-term, a much greater exposure (say 80 to 85 per cent) to debt funds is advised.

In the high-risk category of investors, those with a long-term view could put their entire investible surplus into equity funds as they would suit her/his profile the best. As this category of investor is not afraid of taking a calculated risk, at least a 90 per cent exposure in equity funds should be the case. For those with a medium-term view, the exposure to debt funds could be marginally increased to 15 per cent, but the exposure to equities could also be raised, provided one is sure of future cash flows. And those with a great appetite for risk and those taking a call on the short-term, what better than to remain invested in equity.

But the investment philosophy of the mutual fund should jell with your objectives and investment horizons. A mismatch between your objectives/investment horizon and/or risk taking ability and that of the fund that you choose could turn extremely unhealthy. Another important factor to look out for is the conversion of the fund's philosophy to the desired numbers -- numbers that would result in an increase in the NAV of the fund. If the desired numbers don't materialise, the philosophy doesn't matter.

But if the returns are there, it also solves the most common dilemma faced by investors -- that of investing in a fund with a low NAV or a higher one. If the desired numbers are coming through, then it doesn't matter if the NAV is high or low. What matters more is the management quality and expertise.

Thus, even if one invests at a high NAV, good returns could be enjoyed. Other things remaining constant, if the fund has delivered a higher NAV, it points towards a good performance.

While taking investment decisions, one could also consider other investments -- like in fixed assets, gold, Public Provident Fund, LIC and other savings accounts. One should also take into account investments made by one's family. Finally, it would also be prudent and helpful to take the advice of one's investment and tax consultant.

Tell us what you think of this feature