Monday, March 16, 2009

HOW TO EVALUATE THE VARIOUS INVESTMENT OPTIONS


There are so many investment options like mutual funds, insurance, ELSS,gold, FD, NSC , PPF, POMIS, Senior citizen saving scheme, Pension plans etc available to Indian investors that it sometimes becomes difficult for him to decide where to invest his hard earned money. While investment decisions are primarily driven by ones investment goals and risk appetite it still requires some research and analysis before one can zero in on the final investment tool/option.


So how should we go about it? What should we check before we choose to invest in a plan/policy etc? Well there are primarily 5 parameters on which we need to analyse each and every investment option before we put our money into it. They are

1. SAFETY - First and foremost concern of every individual is to ensure that the money which he is investing is secure i.e. the money comes back to him either more or equal to the amount invested. There should not be principal erosion in the investment. Equities don't fare too well on this parameter as they can never guarantee that due to their high volatility. While some do well on this parameter.

Example :- All debt based instruments like Fixed Deposits, NSC, PPF,Bonds etc.

2. RETURNS -Another parameter on which the investment option needs to do well is return that it offers to the investor since this is the primary reason why people invest. Equities over a longer period of time do give high returns while most of the debt funds give lower returns. Risk and return are inversely proportional and hence funds which dont do well on security will generally do well on returns front. As they say "No guts No Glory". Investment options which do well on returns are

Example:- Equity Based instruments like Mutual Funds, ELSS, direct stock etc. Within debt funds senior citizens saving scheme does give higher returns as compared to other debt funds.Post Office Monthly Income Scheme too does give better returns.

3. LIQUIDITY - You never know when you might need your money and as such liquidity aspect of the invested money can never be underestimated. Funds which allow easy and quick liquidation are generally good to invest. There are lot of options which are pretty bad on liquidity aspect like PPF, NSC etc. The money invested here gets locked in for a certain period and even if you do withdraw, you will have to pay penal charges on it.

Example:-Gold,Fixed Deposits in banks,Liquid funds etc are very good on liquidity aspect.Absolute liquid investment would be money in your saving account, but, that is not investment in true sense.One should look at building one's emergency fund out of these options.

4. TAX BENEFITS - One of the main drivers of investment ,in India at least, is the tax benefits associated with various investment options. Government offers tax incentive to induce saving habit in people . This too is very important parameter as investment in tax saving instrument help you lot of money in taxes which you consider as immediate returns out of the money invested. For example for someone in 30% tax bracket, an investment of Rs 100000 in tax saving instrument like ELSS will save 30000 in taxes , hence we can say that his investment in ELSS gave him 30% return on investment itself. So makes sense to invest in tax saving instruments if you have that Sec 80C limit with you.

Example: Sec 80C - ELSS

5. LOAN FACILITY - Some people also look to take loan on their investments. Investment in insurance endowment policies can be used to take loan against them. LIC uses this feature as selling point for lot of its endowment plans.

Example - Endowment plans in insurance. PPF , NSC etc.

So, next time when you decide to write a check for investment , do run through this checklist and accordingly write the payee details on it.

Stay wise n Stay wealthy....

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