Navigating the continually changing financial markets can appear intimidating to investors, particularly when confronted with the task of selecting the most suitable savings vehicles. With a multitude of choices, each accompanied by its unique array of risks and potential gains, it can be challenging to determine the optimal starting point.
There are lots of investing opportunities available in the market including stocks, mutual funds, gold investments, real-estate investments, government-backed deposits, and more. More mutual fund houses are coming up with new fund offers (NFOs), the Reserve Bank of India (RBI) recently came out with its Sovereign Gold Bond (SGB) investments, personal finance experts advising their clients to take advantage of falling gold and silver prices to augment their allocations into gold and silver exchange-traded funds (ETFs), infrastructural boom promising a rise in real estate prices and the government on a spree to revise rates in various schemes to encourage more people to invest in them.
However, amidst the multitude of choices available in the market, individuals often make selections while harbouring a nagging belief that superior options exist. Upon reviewing our investment portfolios, it’s not uncommon to discover stocks and funds that have outperformed our chosen investments, leading to a sense of regret for not selecting them.
In the midst of a multitude of financial products and their diverse variations, several key factors warrant consideration before selecting an investment or product. So, before you dive deep down into various investments and look for ones that would help you meet your financial factors, let us look at various tenets and factors to pick the right investment option. These include:
Return on Investment (ROI)
Return represents one of the foremost considerations for investors when making investment decisions. However, it’s crucial to bear in mind that return is just one aspect of a comprehensive evaluation. Other critical factors, such as risk, liquidity, and tax implications, should also be taken into account.
Fixed deposits offer a predictable, fixed rate of return, providing clarity on your earnings from the investment. Nonetheless, they typically yield lower returns compared to other options like equity shares. Equity shares, on the other hand, offer returns linked to market performance, resulting in varying returns based on stock market fluctuations. While equity shares offer the potential for higher returns, they also come with a higher level of risk.
The ideal investment choice hinges on your individual circumstances and investment objectives. If you prioritize a secure investment with assured returns, fixed deposits may align well with your needs. However, if you are prepared to assume greater risk in pursuit of potentially higher returns, equity shares could be a more suitable option.
Risk profile
Risk constitutes a pivotal consideration when making investment decisions, as it directly correlates with potential returns. In essence, the greater the return an investment promises, the higher the accompanying risk, as there always exists the possibility of incurring losses on your investment.
Investments carry various types of risk, encompassing:
Market risk: This pertains to the chance that the value of your investment will decline due to shifts in the overall market.
Liquidity risk: This involves the risk of encountering difficulty or delays when attempting to sell your investment.
Credit risk: It relates to the possibility that the issuer of your investment may be unable to meet its debt obligations.
Political risk: Political events and changes in government policies can impact the value of your investment.
Currency risk: Changes in exchange rates can influence the value of your investment, particularly if it involves foreign currencies.
Comprehending the distinct risks tied to each investment is crucial before making a decision. Additionally, assessing your own risk tolerance, which represents the degree of risk you are comfortable assuming with your capital, is paramount.
If you possess a lower tolerance for risk, opting for less risky investments is advisable. Conversely, if you are open to accepting greater risk, you may have the opportunity to pursue potentially higher returns.
It’s worth noting that risk and return share an inverse relationship. Higher risk often corresponds with the potential for greater returns. However, it also implies an increased likelihood of experiencing losses. Achieving an equilibrium between risk and return that aligns with your financial objectives is vital. Furthermore, bear in mind that your risk tolerance may evolve over time, prompting the need for periodic reassessment.
Extent of liquidity
Liquidity stands as a pivotal consideration in the process of selecting an investment, denoting the ease with which an investment can be swiftly and effortlessly sold without incurring losses.
Certain investments, like fixed deposits, come with a predetermined lock-in period during which you cannot withdraw your funds, often lasting around five years. Premature withdrawal from such investments may result in penalties.
Conversely, investments like mutual funds typically offer greater liquidity. Mutual fund shares can usually be sold expeditiously without facing penalties. However, it’s essential to be aware that some mutual funds may impose their lock-in periods, necessitating a review before investing.
Opting for a liquid investment is advisable when the need for quick access to your funds is a priority. Conversely, if immediate access to funds is not a pressing concern, investments with lock-in periods may offer the potential for higher returns. Here are some of the most liquid investment options:
Cash: Cash ranks as the most liquid investment, permitting easy buying and selling without incurring fees.
Money Market Funds: These are a category of mutual funds that primarily invest in short-term debt securities. They are known for their high liquidity, typically allowing for quick and penalty-free sale of shares.
Short-term bonds: Short-term bonds mature within one to five years, making them more liquid compared to their long-term counterparts. They can often be sold swiftly without penalties.
Liquid mutual funds: Liquid mutual funds encompass a range of asset classes, including stocks, bonds, and money market instruments. They generally offer high liquidity, enabling you to sell shares swiftly and without incurring penalties.
It’s crucial to acknowledge that while liquidity is an essential consideration, it’s not the sole factor to contemplate when making an investment decision. Other factors, such as risk, return, and your individual financial goals, should also play a significant role in your investment strategy.
Taxation rules
Tax considerations constitute a significant factor to weigh when selecting an investment. Different investments come with varying tax implications, including potential tax benefits or liabilities upon redemption or withdrawal.
Here are some of the prevalent tax implications associated with different investments:
Equity-linked savings schemes (ELSS): ELSS, a category of mutual funds primarily investing in equity shares, offer a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. However, gains from ELSS are subject to capital gains tax, necessitating payment on the difference between the purchase and sale prices of your units.
Public Provident Fund (PPF): PPF, a government-backed savings scheme, allows investments of up to ₹1.5 lakh annually. The interest earned on PPF is tax-free, and the maturity amount is also exempt from taxation.
National Savings Certificates (NSCs): Another government-backed savings scheme, NSC, offers a guaranteed interest rate, permitting investments of up to ₹1.5 lakh each year. The interest accrued on NSC is not subject to taxation, but the maturity amount is taxable.
Fixed deposits (FDs): Fixed deposits, a type of savings account with a fixed interest rate, are associated with taxable interest income.
Mutual Funds: Mutual funds pool investors’ funds and invest them in various assets such as stocks, bonds, and money market instruments. Gains from mutual funds are typically subject to capital gains tax, calculated based on the difference between the purchase and sale prices of your units.
It’s essential to note that tax implications can evolve over time, and tax rules may change. Therefore, it is prudent to consult with a tax advisor or financial expert before finalizing any investment decisions to ensure you are making informed choices aligned with current tax regulations.
Investors should also take into account a multitude of factors when selecting an investment, including the investment's purpose, objectives, and the timeframe for needing the funds.
Investment purpose: The purpose signifies why you are investing. Is it for a short-term goal, like a home down payment, or a long-term objective, such as retirement planning?
Investment objectives: Objectives define what you aspire to achieve with your investment. Are you seeking a secure investment with guaranteed returns, or are you open to assuming more risk for the potential of higher returns?
Timeframe for funds: The timeframe relates to how soon you will require access to your investment. If you need the funds in the short term, selecting a liquid investment is essential. However, if immediate access isn't imperative, you might opt for a higher-yield investment, even if it has lower liquidity.
Informed investment decisions result from a comprehensive assessment of all these factors. Conducting thorough research and aligning your investment choices with your specific goals will empower you to make well-founded investment decisions.
