| Where Should I Invest My Money? |
 |
 |
 |
| Written by Sumedh Inamdar |
| Wednesday, 07 July 2010 18:27 |
|
Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka "Rising costs" eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation.
Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka "Rising costs" eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation. The returns from debt, can at best give you the same (or a little better) purchasing power, after 10-15 years. They can never give you AWESOME returns that can make you feel great about yourself. The only way where you can expect really AWESOME returns is the Equity markets. The BSE sensex, which is comprised of 30 top shares of BSE, has grown by around 16% per anum over last 10 years or so. Investing in index insulates you from the risks involved in picking 1 or 2 stocks, but also caps the upside. But the fact is, 16% is a fantastic return against 7 or 8% that you get in FDs. Can't believe me? Just do the math to find out the difference between the amounts that you get for these 2 percentages by some online interest calculator. 2. This calculation above doesn't include dividend income, which can give you a 'bonus' of around 0.25% to 2% over and above the capital gains (gain from growth of the stock price). Typically, large stable companies give out more dividends. The difference between the best and worst FD is not that great. May be 1% point in interest. But difference between the best and worst stocks in the market is enormous. If you can pick up which small cap companies will be blue chip companies in 2020, you don't need to do anything else in your life! :) 4. Picking losers - There is of course a risk factor to equity. For example, if you had bought DLF in early 2008, it was trading at around 1000 Rs. and now it languishes at around 300 Rs now, after 2.5 years. So your sum of 100,000 would have become a measly 30,000 Rs! In the same period, a 7% FD would give you a relatively healthy total return of around 1,18,000 Rs. For those, who don't want to be hands on, mutual funds is a great investment option. You give away some "Exit load" (typically around 1% of your investment) as their fees, but you don't need to monitor your investment every month. There is also an option to put monthly installments called SIP (Systematic Investment Plans) in MF units. The top performing mutual funds can outperform the benchmark indices (like Sensex or Nifty). The truth is, whatever the marketers may tell you, that a lot of people make wrong decisions in markets, and lose money. Only a handful of companies become "blue chips" over the long term, and the choice of what you buy matters a lot. If you prefer doing your own research, and are investing for long term, try to go through annual reports of the company, rather than relying on brokerage reports. If you want to make your own decision, I would say, only invest in the sectors that you understand. E.g. it is very difficult for a commoner to understand pharma companies. Their businesses typically rely critically on law suits and patents, which is a high risk proposition. So invest in them only if you understand the industry as a whole. If you are looking to invest in mutual funds, research their historical returns. Also try to have different kinds of funds in your portfolio. Just like stocks, mutual funds that hold these stocks carry similar risks and rewards. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Moneyvidya is an Indian Web 2.0 stock picking website that helps you choose the best share tips for NSE/BSE. It is done by tracking the performance of all the market analysts on several parameters like profits and consistency. |