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28 March, 2024 21:39 IST
Financial Planning
   
Investment options for small investors in 2015 based on trends in 2014
Source: IRIS (22-JAN-15)

The year has been was one of the best years in almost half a decade for investors across the board - equity, debt, etc. The main takeaway from 2014 is that markets can surprise, and it has imparted the lesson that the best investment option for long term is SIP in equity markets. The markets which hit new lows less than 18 months back are testing new highs on a regular basis - which translates to retail investors needing to invest in equity mutual funds via the SIP route. Investors investing through SIP's purchase more units when the market falls and fewer units when the market rises, therefore the average cost per unit declines over a period of time thus being an effective tool of risk management. Benefits can be availed if the investor sticks to their investments on for the long term, since markets are subject to high volatility.

Let us look at some of the investment options available for small investors:

Invest in Tax Saving Instruments:

An important factor which people forget while making their financial goals is their tax expenses. It is always advisable to choose an investment that can pay you good returns at lower tax rate. This is called tax adjusted returns, and unless this figure is higher than the inflation rate, then the investment will not yield any real returns over the long term. One can make use of Section 80C which now offers maximum deduction of up to Rs 1.5 lakh in various investments such as Public Provident Fund, Life Insurance Premium, National Savings Certificate, Equity linked Saving Scheme, fixed deposit of five years with banks and post office etc. These investments can be used to offset taxes to ensure that one earns better overall returns.

Insurance:

One should always keep in mind that insurance is critical and ensure sufficient insurance coverage. It is advisable to regularly check the cover and to estimate current and future insurance needs - be in for vehicle, home, life or medical, and then make a decision if there is sufficient insurance cover or to increase/ change the cover.

Global Funds:

The main benefit of investing in a global fund is diversification. The biggest advantage of global funds is the reduction of geographic portfolio risk by diversifying into various funds globally. So if the Indian markets are not doing well, one could always invest in a market which is doing well, as most markets do not always move in tandem. Diversification lowers in the inherent risk involved in a portfolio.

Another benefit of global funds are the growth potential. An investor can take advantage of regional growth across the world. If an investor is stuck to a particular market, he will not be able to make the most out of growth in other markets. However, one should always sure a lot of research is done on the macro-economic factors before investing. It always better to invest in a developing market for better returns. It is also important to keep in mind the risks involved with investing in global funds, especially since such risk can be different from the investment risks in India.

Gold:

Gold is another interesting investment avenue, especially since it is regarded as a safe haven in times of distress. Currently, gold has lost a lot of its sheen due to the run up in equities and investor risk appetite increasing, but having around 5-10% of one's portfolio in gold is always advisable. However, given the current scenario, we would suggest that one purchase physical gold only for essential requirements such as marriages, etc, and invest in it through ETFs / mutual funds in order to diversify - this is especially true of the majority of one's investments are in equities.

Start Early:

Long term investments are the best option for individual investing early in life, since one can benefit from the power of compounding. For example, let us assume you have a financial goal of reaching Rs.50 lakh as your target amount in 10 years, and the rate of interest is 14%, then you need to invest Rs 18,853 every month for 10 years to reach your financial goal. Assume you changed your mind now you fix the same financial goal of 50 lakh to be reached in 15 years at 14% interest rate then you need to invest just Rs 8,316 every month.

Systematic Investments:

It is advisable to invest in mutual fund through the Systematic Investment Plans (SIP). Since a Systematic Investment Plan route ensures that one doesn't need to time the market, the investment in SIP takes place each month irrespective of the market condition thus individuals can benefit from both an up market as well as a down market.

Summary:

> Invest regularly through the SIP route
> Diversify your investments based on your risk profile and financial goals
> Make a budget and stick to it
> Ensure that you do not forget to save taxes

(Contributed by Anil Rego, CEO & Founder, Right Horizons)


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