By: Sayantani Kar & Deeksha Kapoor
Amid a galore of online and offline advice, we round up the best ways to get the most on your capital
The best way to invest money is to take it out of the savings account. Now that that is out of the way, let’s look at where to invest to get higher returns.
Investing becomes easier when we know our financial goals. But, most of us get overwhelmed thinking it must be some marquee goal that needs to be pinned down before investing. Chalking out goals of all sizes can get us started quicker. Some short-term and some long-term.
Indians, for the longest time, have depended on non-financial instruments/physical assets to invest. Say, buying gold jewellery or parking money in real estate. But our financial markets have evolved and it is time for us to get a little more savvy.
Real estate, in major cities, is poised on the brink of a bubble (inflated price, excess supply), while gold jewellery, with its making charges and wastage, has been debunked as a wise option.
Financial markets, on the other hand, offer more flexibility and once understood, can be tailored for an individual. There are debt markets (fixed income, ie. providing a steady interest rate) and equity markets (income in sync with market forces, can swing either way, multiplying or eroding your principal amount).
Fixed income vs equity
We go with debt or savings schemes if we want to close our eyes and invest. A fixed interest rate on the sum we put in, sounds like a win-win. But why would we want to go in with our eyes closed?
Just as the sedate interest rate on our bank savings does not do our money any favour, fixed interest schemes might also not be the best option always.
Equities can earn multiples in a short time and if we stay invested over a few years (five years and above), then a growing economy like India’s will reward us with rich tidings at the markets.
Equities are better suited for long-term goals (buying a house, retirement, children’s education), while debt or fixed income instruments are suitable for short-term goals (such as a holiday).
But equities also carry risk. Therefore, it is best to invest in a diversified portfolio that suits an individual’s risk appetite and goal tenure.
If one wants to be conservative, here are some saving schemes and debt instruments that can suit all kinds of investors, old and young.
Public Provident Fund (PPF) – The regulated savings scheme comes with a sovereign no-fail guarantee. The amount we put in can rake in a compound interest that is tax-free, but with a 15-year lock-in period.
National Pension Scheme (NPS) – Among tax-saving retirement investment schemes, this regulated scheme is a mix of equity, liquid funds, corporate bonds, government funds, and fixed deposits. The best part? It assures a minimum pension and lets us choose how much of the corpus can go in equities through this.
Fixed Deposits (FDs) – Bank FDs are preferred by many investors as ‘safe’ instruments.
Banks regulated by Reserve Bank of India (RBI) have some safeguards but the degree of safety depends on the creditworthiness of the bank. Large banks such as SBI and HDFC will keep our FDs reasonably safe, but small cooperative banks, unregulated, will not. The latter can swipe away hard-earned money with the promise of higher interest rates.
Government Securities (G-Sec) – These are a better bet than FDs in terms of credit worthiness. Bonds issued by the Government of India come with the highest credit quality assurance, but earlier, they were not accessible. In 2017, RBI opened up the access to these for retail investors, who could apply for them in a manner similar to an initial public offering. Of course, G-Secs can also be invested in through mutual funds (MFs) and exchange-traded funds (ETFs). However, it still remains difficult to subscribe to G-Secs for a retail investor because they are not available in large quantities (liquidity constraints).
Equity, but not mutual funds
Debt instruments should not weigh down our investments. Directly dabbling in stocks, commodities and futures and options (F&Os) could open up a new world for an investor, but it is highly risky.
That is why mutual funds (MFs) have been a popular stepping stone for the retail investor. They play a diversified field without parking our money with specific companies. Managers steer the fund (whether we invest with a systematic investment plan, SIP, or directly) to purportedly beat the markets.
Yet, MFs have not been beating the market these days. A host of reasons have cast a doubt over their evergreen relevance for the retail investor.
Popular opinion says MFs’ gains are earned in the long term. But in reality, MFs are bound to underperform the markets with time. The fund manager’s bias creeps into these actively managed investment products.
In the short term, MFs can still manage good returns at times, but that requires the investor to stay on top of market rallies and company information to capitalise on such gains. It defeats the sales pitch of putting our money in an MF and letting it do all the work.
Outflows in all categories of MFs, except the pool of SIPs, have shaken the confidence that took so many years to build. Even debt MFs have suffered due to corporate debt downgrades which have hampered their returns.
ETFs – The right alternative
The world over, individual investors have turned away from regular MFs and to another set of investment products that are only now catching up in the Indian market.
Index-linked equities instruments such as index mutual funds and ETFs have become the investors’ darlings worldwide. In India, these are now an attractive and wise option for people looking to invest to earn well.
ETFs are pooled investment vehicles that can be traded on the stock exchange like a single stock. An index fund is a type of mutual fund, run by an Asset Management Company (AMC). Both are passive funds, without a fund manager actively overseeing them.
Hence, these cost less than regular MFs and are geared to perform in line with the market because they are linked to the flagship indicators (index in a stock market, for example).
While index funds would still be MFs, with some of their characteristic drawbacks, ETFs are a separate group of products, giving us more flexibility.
When we invest in such a product, we are lining up our capital to take advantage of high returns possible in the equities markets. At the same time, we are ensuring our money does not underperform the benchmark returns.
If the benchmark index falls, our investment does not fall further (say, the Nifty drops 20 basis points, your ETF would too. But in an MF, if you were invested in a sectoral MF, it could have tanked more say, 50 basis points).
Moreover, we could revisit the option of investing in gold, through gold ETFs. Similarly, debt ETFs are a portfolio of fixed-income instruments tracking a fixed-income index.
When we set out to invest, it would be best to divide our money across investment products. A fixed-interest savings scheme will keep steadily earning for us and let us withdraw a part of the fund after a time.
Buying a house could be a long-term goal that we can wait for, and when we have a chunk of funds to spend. But, the way to reach the larger goals would be to begin little and invest every month. For most short, medium and long-term goals, SIPs in a diversified portfolio of ETFs are the best bet.
And, there you have the script for a good starter pack for investments.