As long as you are in college, the common advice you get is: study well. But once you get a job and you start earning, the advice you get changes. Your family members advice you to start saving. Saving is good but it is more important to invest.
But with so many investment options available, it is difficult to zero in on one investment option. Also, what is the right time to invest in a particular avenue?
Well, the answer depends on various factors, one of them being the goals you set in your life. However, your life goals may vary. You may have a set of goals you wish to achieve in the next two, five, 10 or even 20 years. Based on the time limit, your investment goals can be divided into three categories:
a) Short-term goals
b) Medium-term goals
c) Long-term goals
Investment in short-term goals
A short-term financial goal can be something you wish to achieve in the next week or in the next year. Typically, the time span for short term goals is anywhere between one week and two years.
For short-term goals, it is good to earn a steady rate of return. But it is also very important to ensure you don’t lose your investment capital. That’s why investment in equities can be a bit risky as they are generally volatile in the short-term. That’s why investment in debt is quite popular among investors when the time limit is less.
Investment options for medium-term goals
Medium-term goals can range anywhere from 3 to 5 years. For example, you may want to buy a second car in the next three years. For goals like this, it is best to invest in a healthy mix of debt and equity. It is good to invest in balanced fund to get good returns and to protect capital from exposure. Investment in ELSS funds is also a good option. The best part about ELSS investments is that in addition to good returns, you can also avail tax benefits.
Investment options for long-term goals
Life is uncertain and it is always good to plan for the future. That’s why planning for a retirement that is 30 years away is not uncommon among investors.
Buying a house or funding your kid’s college education are some of the common long-term financial goals. These goals may be 10-15 years away but it is important to start investing today.
It is best to invest in equity funds, ULIPs or stocks for long-term financial goals. Investing in these avenues helps investors get great returns. For example, equity mutual funds offer anywhere between 10-15% per annum and stocks have the potential to offer much higher returns.
Investment in stocks is generally considered risky. However, the long time period helps investors to digest risks down the line. Investment in PPF funds and NPS are viable options if saving for retirement and capital preservation are your biggest goals.
With so many investment options available, it can get confusing. So, instead of asking which investment to choose, the better question is: what is the right time to choose this investment. So, based on the time period of your investment goals and your risk appetite, you can make your investment decision.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
Step by Step Guide to Investing
“What next?”It is probably the most popular question that you get asked by family members when you go home for holidays. You may have completed your education and have just bagged a well-paying job but your family may always ask: “What next?”Well, the right answer to this would revolve around investment. Not saving, but investment. That’s because investing can help your money grow faster. So, if you want your money to work hard for you, here is a step-by-step guide to help you chart your investment journey:Step 1: Educate yourselfIf you are new to the world of investments, don’t worry. It is not a big deal. The best thing about investing is that literally anyone can do it. Did you know that the famous investment guru Warren Buffett bought his first share at the age of 11!But in order to get started, you may need to educate yourself before investing. There are a lot of different investment avenues such as bonds, stocks, mutual funds, Unit Linked Insurance Plans (ULIPs) and so on. Each of these investment avenues have their own pros and cons. The risks and returns vary. Try to read as much as you can so that you can get a better understanding about these avenues.Step 2: Find out how much you can investEveryone operates on a budget. And whatever remains after the expenditure is labelled as savings. The general formula for most people is: Income – Expenses = Savings However, the ideal formula should be:Income – Savings = ExpensesHow much money you save shouldn’t depend on your expenses. Instead, how much you spend each month should depend on your savings. This small change can help you increase your savings. With more savings in your account, you can invest more. This can help you increase your financial returns later on. So, sit down and draw up your list of financial goals. And based on that, you can figure out how much you need to invest each month in order to reach these goals comfortably.Step 3: Find an investment advisorWhen you invest in the stock market, picking the right stock at the right time can be very crucial. That requires a lot of time and expertise. However, most people who invest in stocks, bonds and other avenues have regular jobs. It may not be possible for them to spend a lot of time researching markets on a daily basis. That’s why an investment advisor can be very helpful. An investment advisor can help you identify the right investment choices based on your short term and long term goals.Step 4: Understand your tolerance for riskWhen it comes to investments, there is always a degree of risk. Whether it is a savings bank account or the stock market, you cannot avoid risk. However, the degree of risk varies from one investment option to another. It is commonly said: higher the returns, higher the risk.It is important for you to know how much risk you are willing to take. This is because each investor has a different risk appetite. For example, if you have a low tolerance for risk, it would be unwise to invest in certain avenues like shares. But remember that if you put your money only in a savings account to play it safe, you can risk losing out on higher returns in the long run. Step 5: Create an investment portfolioFinally, you can start investing. Based on your investment goals and your risk levels, you can chart out an investment plan with your advisor. You can put your money in options like bonds, Public Provident Fund (PPF), National Saving Certificates (NSC), mutual funds, gold or shares. The important thing is to ensure that your portfolio is well-balanced. For example, you may want to invest in equities. But don’t forget to invest a portion of the money in debt options. This is because, if the stock market crashes, your entire investment doesn’t go down at the same time. The debt investments can give you good support at such times.ConclusionInvesting is not a destination. It is a lifelong journey. Follow the above steps and you can kick-start your investment journey on the right foot. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
What is debt?
Every company needs funds to grow its business. It can raise these through two kinds of instruments – equity and debt. What is debt?Debt instruments are issued by companies and the government to borrow funds from investors. In addition to financing growth initiatives, issuers use these funds to meet unexpected cash requirements or generally bridge the gap between income and expenses. Debt is generally raised for a very specific purpose that is mentioned in the term of agreement, called the bond covenant. There are several types of debt instruments. They are classified into short-term and long-term based on their maturity.- Short-term debt instrumentsShort-term or money market instruments have a maturity of up to one year. They include Treasury Bills (T-bills), Commercial Papers (CPs), Certificate of Deposits (CDs), Repurchase Agreements (Repo), and Banker's Acceptance.T-bills and CPs are among the most common money market instruments. T-bills are issued by the central government for maturities of three-month, six-month, and one-year. CPs are issued by companies and have a maturity ranging from one to 270 days. - Return on Zero-coupon bondsT-bills and CPs are called Zero-coupon instruments because neither pays periodic interest (called coupon). Instead, they are issued at a discount and redeemed at par. For example, a company may issue CPs worth Rs.100 each (called par value) at Rs.96 (i.e. at a discount of Rs.4). If you invest in it, you will receive Rs.100 each on maturity. The difference of Rs.4 is your return.- Long-term debt instrumentsThis includes bonds issued by companies and the government for a term of above one year. They generally pay a periodic coupon and return your original investment at the end of the term. The coupon rate can be fixed (such as 6%, 8%, 11%...) or floating. The coupon for a floating rate bond depends on another rate and is calculated using a fixed formula every time. For example, a floating-rate bond linked to inflation is called an inflation-linked bond. Its coupon is calculated using an inflation-based formula like [inflation rate + x%]. Why companies raise debt?You must be wondering why companies raise debt when they can raise money through equity. Simple: equity and debt are different products with unique characteristics. The sum of funds raised through these is called the company’s capital. The objective is to weigh the features of these products and decide the company’s ideal capital mix or, formally, capital structure.Debt is a cheaper source of funds than equity because the coupon rate is always lower than what the company pays equity holders. However, unlike equity dividends, the company is legally bound to pay the coupon in every period. Equity dividends can be increased, decreased or even cancelled at the company’s will.Also, promoters have to part with their shares whenever a company raises equity. This reduces their say in the business and they are not always willing to do this.Risks of investing in bondsBonds are considered low-risk investments because they pay a regular coupon and give investors a legal claim on the company’s assets in case their dues are not paid. Although safer than stocks and other instruments, bonds are not completely risk-free. The ability and willingness of the borrower to pay you are the greatest sources of risk for bond investors.Increasing interest rates is another major source of risk because bonds trade on the exchange like stocks. When interest rates increase, new bonds with the same features pay a higher coupon. This reduces their value on the exchange. Let’s look at an example.Suppose you own a bond that pays 9% coupon. When interest rates go up, new bonds with the same characteristics will pay a higher coupon, say 10%. Investors that are holding the same bond as you will sell it and invest in the new bonds. But they can only sell at a lower price because other investors would rather buy the new higher-paying bond for the same price. So, your bond’s price will fall, resulting in a loss. Risk premiumThe government is the safest borrower because it is the most likely to meet its bond obligations. This is why government bonds are called risk-free bonds. All other bonds are considered riskier. However, to compensate investors for the risk they take by investing in their bonds, other bond issuers pay a higher coupon than government bonds. This extra coupon is called the risk premium.To sum upEquity and debt are just as important to your portfolio as to a company’s capital structure. Equity maximizes returns and debt minimizes risk. Your investment strategy should be to optimally allocate funds to debt and equity based on your investment objectives.If returns are more important to you, invest more in equity. But be prepared to incur losses along the way. If security is more important to you, invest more in debt. But don’t expect supernormal returns. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
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