Saving money is as important as earning it. There is no point in earning money if it cannot help us realise our goals or tide over uncertain times. However, can savings fulfil all goals in your life? Absolutely not! Savings in a bank account does not generate sufficient returns. Also, a rupee worth today will be less worthy tomorrow, with inflation eating away your savings. In a way, savings without generating appropriate returns actually reduces your purchasing power and heightens your risk of not achieving your financial goals. Therefore, you need to look for investment options that can beat inflation and also help achieve your financial objectives.
There are myriad financial investment options that are currently available to an average investor. However, the first step towards making an investment is determining the objective of the investment. Objectives could be long-term or short-term. Purchasing a car or planning for a vacation could be treated as short term goals whereas children’s education and marriages along with retirement planning are long-term objectives. Your investment should be aligned with your financial goals. There is a plethora of investment opportunities available today like bank deposits, post office deposits, ULIPs, insurance, stock markets, mutual funds, bond markets, investments in gold and real estate. All these options are quite different from each other in terms of asset type, return and risk involved.
The advent of technology has made investment opportunities simpler and easier. With banking and trading apps available widely, we can track our investments or execute our investment decisions from anywher, anytime. Information regarding all kinds of financial investment opportunities is just a click away! Various advisory and equity research companies publish their recommendation every day. Thus, there is no shortage of information, but is this creating a problem of plenty? Although there are websites, which aggregate and put all the options in one place, getting confused with these options can be easy.
Let’s try to understand the characteristics of some of the investment options stated above. The most common investment option in India is fixed deposits, which is also believed to be the safest investment option. Returns from FD are not necessarily very high and oft times, not even sufficient to beat inflation. Add to that, the investment is also locked in for a fixed tenure. Gold prices have been volatile in the recent times and the economics, which influences gold prices is also complicated. Real estate, on the other hand, has perhaps the lowest liquidity (readily convertible to cash) among comparable investments and after demonetisation, has lost its charm. Stock markets can provide higher returns compared to other investment options. However, these returns come at the cost of higher risk as markets are generally volatile. Whereas, bond markets are less volatile but have liquidity issues and provide lower returns compared to stock market. Picking up the right stocks and bonds require significant knowledge about the markets, company and its financials, which is not possible for everyone who is not in this field. Also, people with financial knowledge find it difficult to balance this cumbersome task with their regular jobs.
Investors need to map their goals and assess their risk profile in order to create a diversified investment portfolio that can not only help them reach their goals but also act like a safety net in times of emergency.