Today morning while going to office, I met one of my school friends in
train after five long years, who is a Computer Engineer and had just got
his first job. After recollecting and cherishing the memories of our
school days and everything, he asked me, “Yaar, tell me one thing; how
to make money, earn highest possible returns on investments with minimum
risk? In short, I want to become a SMART investor”. I told him that you
couldn’t get everything in one basket; you should consider these
factors for becoming SMART investor.
Safety: First thing an investor considers before making
any investment is the safety of the investment instrument. Safety is
nothing but the risk in the investment. The risk can be loss of
principal amount invested or risk of negative returns. As you know the
thumb rule, higher the risk, higher will be the returns and vice-versa.
Risk taking capability differs from person-to-person and the investment
time horizon. Some people are conservative while some are very
aggressive with their investments. For short-term goals, you cannot
afford to take high amount of risk, by investing in equity mutual fund.
Maturity: Maturity
is nothing but the holding period of the investment i.e. how long do
you wish to stay invested in any instrument. You must first decide the
time horizon of your investment and then select the investment
instrument. If you have time horizon of say 2 to 3 years, then you
should invest only in debt instruments like Income Funds, bank fixed
deposit or conservative MIP fund only. Similarly, if you have medium
term time horizon of around 5 to 7 years; then you can invest some
portion in equity (70% - 80%) and balance in debt (30% - 20%). For
long-term investment (10 years or more), you can consider investing 80%
to 90% in equity mutual fund and balance in debt fund and /or gold fund.
Asset allocation and asset selection: You should never
go overboard on any asset class and never put all your eggs in one
basket. You must always diversify your portfolio by investing in various
asset classes in different proportions. You cannot bet on a single
asset class. Your asset allocation should be rebalanced periodically and
reviewing the same. You should not have exposure to gold more than 10% -
15% of your portfolio. Real estate can be a part of investment only for
wealth creation and should not be considered as a goal based
investment.
Systematic Investment Plan (SIP) in mutual fund is
one of the best ways of investing in equity. You should avoid investing
in direct equity (shares) since it requires in-depth research of the
company, sector and the market. For investing debt, you can choose
income funds, Fixed Maturity Plans (FMPs) or Public Provident Fund
(PPF). You can invest in gold by buying E-Gold, gold fund or Exchange Traded Funds (ETFs).
Return: Return
is the most important factor of any investment because the reason you
are investing is to earn return. All investments are a risk and return
game! Recalling the thumb rule, higher the risk; higher the return. You
cannot expect high return from low risk investment instrument. For
example, you cannot expect a bank fixed deposit to give you double-digit
returns. So for earning high returns, you need to bear the risk
attached to the instrument.
Taxability: After
considering risk, return, tenor of the investment instrument, you must
also consider the taxability of the investment instrument. Taxability of
the instrument with respect to tax on dividend or the interest paid,
capital gains and deduction on initial investment. So, in case you want
to invest in a debt investment, you should consider debt mutual funds
income fund or FMPs, instead of fixed deposit; since you get indexation
benefit for holding debt fund more than one year whereas in fixed
deposit the interest is taxable (added to your income, and is taxed as
per your tax-slab rate). The capital gains on equity mutual funds are
tax free if you hold it for more than one year, also the dividends paid
on equity mutual funds are tax-free.
That’s it, I reached my
station and I had to get down. My friend was very happy after learning
how and where to invest and said, “I hope, when we meet next time, I
will proudly say, now I am a SMART investor!” This was our journey with
few discussing moments of our school days and a bit of sharing few
healthy investment tips. You should always keep in mind these factors
before making any investment.
Published in: Moneycontrol.com, The Tribune
