Have time-specific savings
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Investment choices are many. Often, we do not give eno-ugh thought to what kind of investments are suitable for us. Each one of us has a different reason for investing. Each offers us a different rate of return and each carries varying degrees of risk. Often, people ask me for solutions about investment avenues. Some of them have unreasonable expectations. Typically, they want stock recommendations that will give super returns in short periods of time.
Whilst not impossible, the key issue is of timing. You cannot predict the price of a share three years from today. Let me try and layer up the level of risks and the suitability of various inv-estment options.
IMMEDIATE NEEDS
Here, I want to put away some money that I am likely to need within a period of, say, three years. And I do not want any risk to my principal when I draw down. For this, I would go for liquid funds, where I can draw down the money within 24 hours. Here the risk of losing money is zero and I can get a return of six to eight per cent per annum.
If you don’t want to pay taxes on the returns, you can opt for a dividend option, which would give slightly lower returns. Of course, I could keep it in a one year fixed deposit with a bank and break it when needed. But this will be taxable. If I put it in equities or mutual funds, there is a risk that the price may fall and I will have to incur loss. I will not choose an FMP (Fixed Maturity Plans offered by mutual funds) unless I am dead certain that I will not need the money before maturity. The returns one could expect from these aven-ues are in single digits only. So, if I want to double my money, it is not possible with any degree of certainty, for periods of up to three years.
LONG-TERM NEEDS
Typically, I consider 10 years as long-term. However today, people want to think of ‘long-term’ as anything more than a year. I would urge people to look back at market cycles and see for themselves.
For the medium-term, say, up to five years, I would choose fixed dep-osits with banks or high quality bonds issued by companies that have a ‘double A’ or better ratings. Here, the annual taxable returns that I can expect would be nine to ten per cent.
Equities would be a good option if you can use money that we salt away for needs beyond ten years. An SIP in diversified funds would be ideal. However, we do not have any evidence that markets can deliver returns that are in excess of 12 to 15 per cent. So ideally, we should be putting away money that we can draw at our convenience rather than put away money in to equities for a specific need. I can expect some contribution, but it is not certain that it would be giving me a return of 12 per cent. I tend to be conservative in my approach to investment. For me, savings is something I put aside to meet some specific future needs. Investment is the money at risk I put away for more than 10 years.
(The author is an independent investment advisor)
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