Doing repetitive things can get boring. So it seems with investing too… which could be the reason why investors keep asking for new avenues to invest, all the time. If we suggest some Mutual Fund schemes, they say that I have already invested with that fund house, little knowing that we may be suggesting some entirely different scheme, though it is from the same fund house.
Also, there is a perception that investing in Mutual Funds is for the short-term, whereas investing in properties is for the longterm. The perception is ofcourse entirely erroneous. Mutual Funds are probably treated as a shortterm investment probably because they are quoted and their prices are known on a day-to-day basis and selling them is very easy. Also, the taxation for Equity Mutual Funds is benign – Long-term capital gains after 12 months of investment is nil. Equity is treated as an even shorter term investment. It is more often treated as a speculative investment, instead of the actual long-term asset, it can be and should be. Because of this wrong perception many people resort to day trading in equities. Many others keep buying and selling in the very short term usually calculated in days and weeks, instead of years.
However, Mutual Funds and Equities are Growth assets that could give good returns, over time. Those who have invested and stayed the course, will vouch for it. Sensex has given a 18% CAGR since 1979, which is creditable. That is indicative of the kind of returns that this asset class can deliver. The perception continues inspite of knowing these statistics. FDs, Bonds, PPF etc. are investments of choice among people due to the fact that investors want to put their money where there is least risk. But, there is a risk in that too – the risk of money depreciating in real terms, considering tax and inflation.
Closer Look
Citizens chase the latest fads in their quest for new avenues to invest money. Property and gold are the latest to catch their fancy. There are many who tell me that property prices cannot go down in Mumbai. I’m not so cock sure, for one. Their outlook is coloured by the relentless rise in property prices in the last 6 years or so ( with a dip in between in 2008-09 ). But, the steep appreciations which have happened will most probably not happen, in future. Most probably, it will settle in it’s longterm average of 6-9% yearly growth pattern. Those who buy property for investment expecting major appreciation would be disappointed. Property also offers low rental potential of about 3-4% of the property value, for Residential properties. For commercial properties, it is much better at between 6-12% of the property value. Hence, investing in properties should be tempered with this understanding rather than based on the exuberance of the last few years.
Gold as an asset class has been in existence for a very long time. In the past 10 years, it has done well. The longterm performance is not as good – 8%+ CAGR for a 20 year period. Gold performance depends on several factors. Gold moves up when there is uncertainty in the environment & when the dollar depreciates. Gold is seen as a storehouse of value and an asset of the last resort ( whether it actually is would need to be validated only in such a scenario ). Gold does not have any real use other than ornamentation. It is also a speculative asset as one will not be able to get any regular returns on Gold, unlike in the case of Equity shares, Fixed deposits or properties. So, the primary reason for buying gold is in the expectation of appreciation in their prices. Any asset which is bought with the only expectation of a future price rise and not other payout is speculative ( Land investment also falls in this class ).
Starting point
Investors need to understand one fundamental fact. Whatever they invest in, needs to meet their goals. Goals have priority. A Retirement planning goal would be high priority and a holiday abroad may be a low to medium priority goal. A goal also has a time frame. For instance, one may require Rs.25 Lakhs after 10 years for child’s education. Some thing like a car acquisition may be more immediate – like a year from now. Whether the goal is short, medium or longterm has a major bearing on how one should save for them. Apart from this, the amount of money required for the goal is of major importance.
After getting these important pointers one also needs to consider the number of years one has till retirement, the dependencies that are currently there in the family and whether it is a single income or a multiple income family & health condition of family members. Based on that, investments need to be made to meet short , medium & longterm goals. Based on the number of years to retirement, the aggressiveness of the portfolio is decided. For a person who has 10 or more years to retirement, the portfolio can be aggressive. Depending on the requirements for their upcoming goals, they could invest upto 75% in Growth assets like Equity oriented assets. The nearer the goal, the amount required for it needs to be brought into debt instruments which is not subject to fluctuations and erosion. This is to ensure that there will definitely be money for the upcoming goal.
There needs to be an over-arching strategy while investing. One needs to know what & where are the goal posts are, while putting together their investments. Also, the focus should be on regular investments with a longterm orientation, instead of trying to ride the crest of the latest hot-selling product. In short, responsible investing.
Author - Suresh Sadagopan ; Published in Business Standard on 17/4/2011
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