While SIPs are an amazing way for
a beginning investor to get started on investments, investing a large amount of
money directly in the different instruments available can also prove
beneficial. If you have a windfall, or a lump-sum saved up, and are wondering
how to invest large amount, don't worry - you are in the right place.
Before going into the details of
where you should invest money in India, you should understand certain basic
principles first. For instance, while investing a lump-sum amount, it is
important that your portfolio is diversified a bit to ensure that your risks
are hedged to a manageable level. Here are some of the key principles that
you'll need to follow before beginning your investment journey.
- Understand
your risk-profile - The quantum of risk that you're willing to take with
your investments is usually defined by your risk profile. For instance,
equity investments are considered to be a risky instrument, while
government bonds and Fixed Deposits are considered relatively safe.
- Understand
Your Financial Goals - Long term investments usually happen to reach a
certain financial goal. Whether it's your retirement, or the purchase of
your dream house - you'll need to define your goal monetarily, along with
an understanding of when you'll need the money.
- Your
risk profile will directly depend on your financial goal, and the time
frame. The longer the time frame (and higher the percentage of money
necessary to be earned), the higher the risk you should be willing to
take. As the goal gets closer, both monetarily and in terms of the
time-frame, your risk profile should naturally levitate to some of the
safer instruments, in an effort to safe-guard your investments.
- Try not
to put all your eggs in one basket. Keep your portfolio diversified. This
will minimize your exposure to any one type of risk - for instance, even
if the Equity market is on a bear run, your debt instruments and gold
bonds will continue to rake in money.
Now that we've understood the
basics, let's now go into the different instruments that you can utilize for
investing a lump-sum.
Equity Investments are considered
to be one of the most attractive forms of investments in India. When you invest
money online in Equity shares of a company, you're essentially buying into the
ownership of the company. Each stock represents a share of ownership, and if
the business you've invested in performs well over time, the value of your
investments are bound to increase.
The short term volatility is high,
and there is a non-insignificant risk that your principal gets wiped out - the
reasons why the equity market are considered risky. However, the upside
potential is also high - 17% returns per annum, on average (as of 2017). In
comparison, when you invest money in FD (Fixed Deposits), you can expect an
average return of around 5%, and the annual inflation rate in India is
somewhere around 7%. You do the math.
It is no surprise that the
percentage of share market investment in India is gradually growing
year-on-year, thanks to increased financial literacy levels in our country.
ETFs or Exchange Traded Funds are
becoming extremely popular in the recent times. ETFs are a type of financial
security that passively tracks any index, asset class, sector, or a commodity,
and can be traded/purchased/sold in a stock exchange just like an equity share
can be.
Different ETFs can track
different indices, or even asset classes. For instance, the SBI Nifty 50 ETF
tracks the performance of the NIFTY 50 Index, while Gold BeES tracks the
performance of gold as an asset class.
Market risk is the biggest thing
you've to worry about when it comes to ETFs, as short term volatility can tempt
you to take a loss, and withdraw money prematurely. The risk is directly
dependent on the underlying asset/sector/index. For instance, the Gold BeES are
considered relatively less risky, as compared to say an ETF which tracks the
automobile sector in India.
Debt instruments are the asset
classes that require a fixed payment to the asset holder, usually along with
interest. The institutions/companies/organizations that issue debt instruments
borrow your funds, and in turn, are obligated to pay you back the principal
after a set amount of time, along with a fixed rate of interest. The rate of
interest depends on the organization issuing the debt instrument.
Even if you haven't made any huge
steps into your personal finance yet, you've probably already invested in debt
instruments. For instance, when you invest money in FD, you're essentially
purchasing a debt instrument. The bank has to pay you back the principal, along
with a fixed rate of interest, usually around 5-6%.
Debentures, company deposits,
public provident funds, National Savings Certificates, etc are some of the most
popular debt instruments in India.
When compared to equity
investments, the risk element involved is definitely less. Some debt
instruments are considered safer than others - for instance, company deposits
are considered riskier than say, investing in the National Savings Certificate.
In most cases, you'll get at least your principal back, but there is definitely
a non-insignificant risk of default.
If you don't have the time or
resources to research individual shares, or debt instruments, you can choose to
entrust your money to professionals who will invest in your stead. Professional
investors, managed by prominent Asset Management Companies (and regulated by
the Securities and Exchange Board of India), will pool the funds from many
other retail investors, and come up with a strategy to invest in the different
instruments. In return for investing your money for you, conducting regular
research and coming up with stocks to invest in, the asset managers charge a
small percentage as a fee.
There are many different types of
Mutual funds in India, and are classified based on multiple criteria. This
could be the level of involvement of asset managers (active funds, and passive
funds), market capitalization of the companies involved (large cap, mid cap,
small cap and hybrid funds), instrument invested in (equity funds, debt funds),
or tax savings benefits (Equity Linked Savings Schemes, and other funds).
Irrespective of the type of
mutual funds, all mutual funds investments are subject to market risks.
Investors are advised to thoroughly read all the scheme related documents,
understand the risks involved before investing.
In India, you can't visit a
single household without someone asking you to invest money in physical gold.
Gold is almost "holy" so to speak, and is the investment instrument
of choice for many individuals, despite there being many "better"
alternatives available (speaking purely from an investment perspective). Gold
has returned an average of 5.7% CAGR (Compound Annual Growth Rate) over the
last decade, despite being considered less risky than some of the other
instruments available.
However, there are also other
costs involved in investing in physical gold. The making and wastage charges
eat away a significant percentage of your investments, lowering your already
low returns on investment.
"But, how else do I Invest
my money in Gold?". We hear you. The Government has heard you as well. The
Government has come up with special instruments called "Sovereign Gold
Bonds", which allow you to invest money in gold, without the handling or
wastage charges. When you invest money in gold bonds, not only are you exposed
to gold as an asset class, the government also pays you a hefty 2.5% simple
interest on your investment per annum (making gold a relatively attractive
alternative for risk averse individuals).
However, the Indian sentiment
towards gold jewelry shouldn't be undermined. The ornaments also have other
functions, which aren't covered in this article - this post purely looks at
physical gold from an investment perspective.
Real Estate Investment in India
is another popular vehicle to grow wealth in the long run. Real Estate here
doesn't only mean investing in houses for you to live in. It can also involve
commercial real estate (extremely lucrative, with a high barrier to entry), and
real estate investment trusts (funds that invest in real estate on your behalf
- think of REITs as mutual funds for real estate).
The Indian Real Estate market is
considered to be extremely lucrative, with expected valuations to reach over $1
trillion by 2030. However, the value of the property depends on many factors,
including the location, condition, and quality of the real estate asset
purchased.
The returns gained from real
estate investments are two fold.
- The
Capital Appreciation of land and buildings, over a period of time.
- Rental
Income gained.
The main barrier to investing in
Real Estate is that there is a high cost to entry. Depending on where you're
purchasing, a half-decent apartment can cost you north of INR 1 crore easily.
If you're particularly wealthy, and want to diversify your portfolio even wider, alternate investments like vintage cars, valuable paintings, pieces of art, NFTs and cryptocurrencies come to mind. Keep in mind that these investments are considered particularly risky, and are not advisable unless you know what you're doing. If you're a beginner investor, it is highly recommended that you stay away from alternate investments.
Cryptocurrencies in particular
have gained in popularity over the last couple of years. However their
volatility and the number of scam and memecoins involved make it particularly
risky for amateur investors to start investing in them.
How to Invest in These Different Asset Classes?
Different
asset classes require a different method of investments. For instance, for
purchasing physical gold, you'll have to visit a gold smith, real estate,
you'll have to meet with the seller, and in the case of equity shares, you'll
have to open a Demat and Trading account. While we can't provide you the
details of the best place to purchase real estates from, we can surely
tell you where you can invest money online - through Goodwill.
Goodwill Wealth Management is a well reputed name in the brokerage industry, and offers you the ability and the tools to purchase a variety of assets. Whether you want to invest in mutual funds, IPOs, Pre-IPOs, equity shares, REITs or even ETFs - all you need to do is open a free Demat and TradingAccount online. Goodwill assures you access to all these different instruments at a very low cost - Equity delivery, for instance, is completely free! What are you waiting for, sign up with Goodwill now!
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