How to determine what is the best investment of the money for optimum results? There is a simple economics of person earning and spending but there is only problem of unevenly spread of income distribution. Thus, there is a need of the time of being financial smart. You can be one by little bit of study and being cautious. First of all you must be earning and saving well and have ability of spending money wisely. Many of us do not even have habit of savings and making investment, but consider yourself as lucky if you are already one who does. There are many benefits of making investment like –
1) You provide for future contingencies, and one should. You never know what may come across you and then you should not regret or held back just because you were short of resources,
2) You create a healthy wealth in your hands out of which you can create multiple opportunities of earnings. That something extra coming to you by smart investment is always welcomed.
3) Government always promote making savings by the citizens and also gives tax exemptions and benefits to the people.
You will tick all above benefits for selected and popular four investment modes for whom I’m going to tell you a few tricks, if you pull off well then you can earn more out of them.
1) Life Insurance Policies
Starting with Life Insurance, frankly speaking I have a bit biased opinion about investment in Life Insurance Policies and I hold it as my opinion. Insurance is a means for protecting survivors of your family from loss of income caused by your death. It is as simple as if you die during the policy cover period then the beneficiary named by you will get the compensation in that case you won over the Insurance company’s expectation of how longer you would live. But, if you outlived their expectations then you would get lesser amount from the company than what your beneficiary might have received after your death. This is a bit of a gamble and sometimes it pays off well or sometimes not.
There are two major types of Insurance Investment Policies
i) Traditional form of Insurance Policy
ii) Unit Linked Insurance Policy(ULIP).
In Traditional form of Insurance Policy the Insurance Company with the services of Actuaries and Investment Planners strategize where can be the premium received invested and its perfect mix so that they continue to enjoy appreciation of that instrument and receive regular income out of it. Major investment is in Capital Markets, Govt. Bonds, Real Estate, Mortgage and Loans. Criterion for selecting the perfect mix of these instruments is their ability of appreciation, popularity, rate of return and present value of future inflows.
In ULIP your premiums are partly apportioned to Insurance cover and remaining part get invested as per your discretion about choosing right mix of Capital Market and/or Long Term Debts. Thus you get dual benefits of Life Insurance and Market Linked Returns also. Here Policy Holder can dictate utilization of premiums in various market instruments, just like how Mutual Funds work about which we will discuss in next point. But if you leave the trouble of investment decisions of your premiums on Insurance Company they may charge you fees separately.
Why do I press upon I have biased opinion about investment of more money in this is because first of all the rate of return you get after all the hassle is much lesser than what actually the Life Insurance Company earns out of your premiums.
For e.g. On an average a Insurance co. yields from the investments into various sources at the rate of 35% i.e. returns on investment. After accumulating and regularly re-investing interim returns the company actually pays you some share over and above sum assured if it is supposed to be paid to you or survivors of your family or any other beneficiary you named, because how much or your beneficiaries will receive will depend upon various circumstances e.g. while you are alive, after your death, at particular age, for particular risk, etc. and if your policy is ULIP then your returns are depending upon the mix of Equity and Debt instruments you choose, Debt instruments gives you more security but fixed return and Equity instruments may gives you astonishing returns but with risk of happening other way attached. So accordingly you get returns which are decided by the position of the market in practical words it is equal to Net Asset Value of your investment. That way you create long term wealth along with protection needs for your family but with risks attached. Thus, I would recommend that one should consider the amount of money that to be invested in insurance policies which should not be less than your assessment of minimum requirement of your family after you and should not be provided more than it is required so that you can diversify your investment decisions to better alternatives.
one more very important tip – whenever you feel like going for new policy investment, where you have one or couple of them always enhance the sum assured over the existing sum assured or add a top up plan rather than taking new policy which would add up the cost of obtaining new policy and carrying cost. I would suggest keeping life Insurance component out of total saving at the moderate level say up to 10-15%. If you ask ‘How we are supposed to earn more out of this tip?’ then I would like to tell you again that this tip is about letting you save money for more rewarding options.
2) Mutual Funds Investment
Coming to Mutual Funds, most of the people might be aware of the term but very few understand the logic behind it. Mutual Funds are actually explained by its name itself. The Funds here on will be called as Portfolio for the practical purpose; the Portfolio Management Company manages your portfolio to the optimum level or at least take efforts for that. The logic is diversifying the funds to the thriving sources out of capital market. Capital market is Companies’ primary and secondary market where we buy n’ sell shares of ownership of the company through the medium of share certificates. So the mutual funds do actually do the whole study of the market and do investment into thriving companies.
The basic benefit is you are saved from all the haste of studying and understanding the capital markets and strategize accordingly where there is a better chance of your failure. But the ifs and buts are not over yet, there is a great chance that whole Mutual Fund might result in the loss. You still aren’t spared from studying the maturity and experience of the Mutual Fund Company, you are still required to assess the performance of that Asset Management Company and choose the better one in the market. One cannot simply put belief on everything on its face value when it is concerned about the money investment you do. Mutual Funds are always subject to market risks and no Portfolio Manager takes the responsibility of the outcome. Be wise when investing in the Mutual Funds but this is a very good source of investment for salaried people. You can always have something extra to earn in systematic way and better than conventional investment modes.
3) Equity Shares Investment
Now the time has turned so well since a few decades when Computers & Internet came into operations of daily business and in today’s more controlled and regularized Domestic and International Markets millions of Companies limited by shares’ liability are operating. Out of them some issues their shares (equity or equity shares) of capital (equity capital) in market which is called capital market. Equity means owners’ interest in the business after paying off all outside liabilities. Holding equity shares makes you the owner of that part of profits of the company and to the extent of number of shares you hold i.e. called the dividend.
How much dividends you will receive will depend upon how much profits the business will generate and after retaining for future expansion and contingencies. You do not only earns through dividends but since the company is constantly reporting huge profits tends to get huge demand from the market which leads to increase in market price of that share and over the period of time you can actually make huge wealth by way of appreciation.
So the public limited companies raise capital from the public in primary capital market by way of issue of equity shares to public. One must able to understand easiness of the operations of these markets and need not be afraid of huge amount of the hedging & speculations going on by the stock brokers & traders in secondary market. Things go parallel to Day Trading mutually exclusive also of whom I’m going to explain how you would become Financially Smart.
Firstly I would suggest taking the fear out of you, fear of ‘losing money’. Many people invest and lose money in share market out of greed, many out of taking wrong advices from friends, many out of ill knowledge about functioning of the market and lastly but not least majority out of impatience. So the Mantra to earn well from equity shares is over coming above limitations need to be learnt. Starting with one that lets you back because of greed, here I want to declare that I’m only referring to long term investors and not the day traders, many investors do tend to purchase cheap shares in huge quantity in wait for share price to be increased but many a times happens other way round that is because there are no prospects in respect of newly entered companies, weakly managed companies and companies from volatile industry so thus there are little chances of prices of shares to be increased because of public demand due to profits that company might make. In fact day traders play with such companies’ shares, these shares are so volatile that in a day’s time traders buy ‘n’ sell in huge quantity for profit booking, they have to square off their account in days’ time. So try to be away of such shares until experts are so sure of their performance. Then the one that about taking wrong advices from friends and relatives, Many a times your friends and relatives who actually does not have part in share market and only knows from newspaper and television are the unwanted free advisors and even if he/she has active part may not be the one who follow expert’s advice and do little bit home work. In share market you are on your own and take your own judgements I won’t say there are risks because you can actually make your portfolio better with buying risk free shares and to know which are they you will have to do your homework a bit. And there are also few investors who have ill knowledge about actual functioning of share market who turns out to be cash traps for self, they firstly purchase wrong shares at wrong time of unjustifiable quantity and then fell for it when the shares shows their true colours. Again the same advice, hire a good broker for yourself who will do the rest for you if you don’t have much time to invest in knowing things. In fact for most of the investors I would suggest look out for a very good broker who actually intend to make growth of your wealth and not just interests only in his brokerage.
And lastly the ones who push the panic button so early and don’t have little patience, I would say to such people If you have purchased right shares with right intent and with right study you need not worry furthermore. There is never a best entry time or exit time for any shares you probably never meet that but once you have got hold of some good companies’ shares irrespective of the price you bought just sit tight and lay back and forget them for years. You earns when you are patient not while selling frequently. These are those people who have good amount of knowledge about market but risk taking ability is lower. There are times when correction period comes for such shares when current market price might be lower than what you bought for but these are temporary times for famous and big companies whose performance is easily measurable from Annual Reports which are easily available on the Internet. People from finance background of education can easily understand these Annual Reports and all such investors should use it as their study material.
4) Real Estate & Properties investment
The last topic of our discussion is Real Estate & Properties. Real Estate & Properties are now becoming more lucrative source of the creating long-term investment in hand with the view of appreciation and creating multiple sources of incomes out of it. This type of investment is obviously for well earning people who can take aside ample amount of money to pay EMIs or to buy by bullet payment. In today’s world of urbanisation many places are getting developed in tune of industry and commerce at balanced blend. People do move to such places for jobs and self-employment followed by amenities and facilities. Amenities and facilities are major source of rise in prices of real estate, more their numbers and quality more the price of properties of that area. You should be wise to judge the investment decision of yours.
This is more about investment in creating wealth than actually earning liquidity though you can earn out of it if you can. If you have extra place or empty place you might think about its investment so that you could earn rental income but of course subject to get taxed. If it is possible then you should go for it. Those who are self-employed have better advantage of owning a property, for their business they require loans and easily get one that in proportion of value of your property by pledging your property as collateral or like in previous case of shares and mutual funds you can also pledge them to the bank to acquire loan . This helps you to generate capital for your business upon which you can thrive. Here few people may have an ample amount of funds after owning residential property for own and can think about purchasing more assets should go for second home, weekend homes, open plots of land. Principles for buying your first home may not be the same for these properties you might not get one at crowded place, it might be at under developed town or city, or in case of land it might be at very remote place too. Ideology behind it is you get it cheap and over a period of years after development of surroundings you will enjoy appreciation of the prices of that property which you may sell at your wish at huge long-term profits.
I will explore more options for you, suitable for your lifestyle and after all permutations and combinations will decide right mix for your investment.
Good Luck ! Keep Visiting 🙂
– Dhiraj Bhole
(Dhiraj is a bright C.A Final Student. He also works as an independent consultant.)