Web Sify
Follow us on
Mail
Print

Avoid complex products

Source : BUSINESS_STANDARD
Last Updated: Sun, Feb 03, 2013 01:20 hrs

The very aim of investing is maximising returns. But in our quest for higher returns, invariably we fall prey to schemes or investments which project high returns, but ultimately turn out to be bad dreams.

These will not only affect our financial goals, but could also lead to loss of money. It is important that you take care of your money as you will take care of yourself or your near ones.

Although maximising returns is an important aspect in investing, it is important not to go overboard and put your money in avenues which are far too complex and difficult to comprehend.

Investment avenues:
Today, there are many investment avenues to choose from in the financial market. So much so that it may be difficult to zero in on the right one. Some of these investment avenues may offer higher returns, but may come with higher risk and complexities. While others may be less complex and risky, but may offer lower returns.

The complexities in an investment can be in terms of :

  1. Liquidity
  2. Returns
  3. Uncertainty in returns
  4. Lack of transparency
  5. Tax implications

EASY INVESTMENT
Fixed Deposits: Bank fixed deposit is easy to comprehend and convenient to invest in. FDs offer modest returns with low risks linked to the tenor of the deposit. Currently, returns are approximately 8.5 – 9 per cent for a one year deposit. They score high on liquidity.

Public Provident Fund: This is one of the safest long term investment options. It is best suited to save for the purpose of retirement. Another advantage is that the returns from PPF is exempt from tax. The current rate of interest on PPF is 8.8 per cent. However, they are for long term and are relatively illiquid.

Post Office Deposits: These are run by the department of posts and offer returns normally lower than bank FD rates. The deposits are risk free investments. The current rate for a one year deposit is 8.2 per cent.

Government of India Bonds: These offer fix rate of return over period of time (currently 8 per cent ). The period of investment is six years.The returns are below the bank fixed deposits. This investment has low liquidity too.

MODERATELY COMPLEX
Company Bonds: These are instruments issued by companies. They are traded on the stock exchange and have a coupon higher than the bank deposits(for instance, bonds issued by non banking financial companies like Muthoot Finance, Shriram transport, and so on). This avenue is for investors who understand the risks of investing in bonds.

Equity: Equity offers higher returns, but is risky. There are chances that investors may lose part of their invested capital. Equities can offer returns in range of 15-20 per cent annually in good times and negative returns in bad times. Before investing into equities it is essential that you understand the market movements and have a fair knowledge about the company you are investing. A caution of advice: Do not invest in stocks on tips or hearsay.

Mutual Funds: Mutual Funds offer moderate returns, but are less risky compared to equity investments. They can offer a return between 10-25 per cent annually in good times. When the market is weak returns can be negligible or at times negative.

Before investing in MFs read up details such as which companies the fund invests in, historical returns and so on. This information is easily available on the websites of all fund houses. You can also consult mutual fund distributors or take guidance from a financial planner.

Bullion: Bullion are part of commodities. One can invest in gold, silver and copper. These may fetch high returns, but are very volatile.

COMPLEX: Unit linked Insurance Plan (ULIP): ULIPs were very popular till recently. Most ULIPs are front loaded with costs. Due to this the returns from them are lower. Although they offer insurance cover along with a lumpsum amount on maturity, due to the initial expenses and the year-on-year expenses, ULIPs provide moderate returns.

Commodities: One can invest in commodities like rice, wheat and metals. Returns from these investments are very volatile and difficult to predict. One should keep track of and understand the weather, crop cycle and market dynamics before investing in such products.

Equity Futures & Options: These investments can offer 5-10 per cent return even in a day. Futures and options are mostly for investors with sound knowledge in this area. People who do not understand the same should not venture into it.

Currency futures: This is an investment where you can benefit from the fluctuation in the foreign currency market. These are also ideally for people with good knowledge about market dynamics in this area and best avoided by those who do not understand the same.

In the past many investors have lost money by investing teak plantation or emu schemes, or in companies that have a bad governance, or have fallen prey to fly by night operators like Stock guru and so on.

Lack of product knowledge or failure to understand complex products have led to losses for investors. At times, the investment can be impacted by tax rules, which investors may fail to recognise.

To avoid an adverse scenario, it is advisable to invest in instruments that we understand. One should choose investment avenues according to the financial goal and knowledge about the instruments.


The writer is a freelancer




More from Sify:
blog comments powered by Disqus
most popular on facebook
talking point on sify finance