Jul 28, 2006 01:24 PM
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(Updated Jul 31, 2006 11:04 AM)
Investmet planning is scientific approach of selecting the best suitable avenues out of options available based on the investor profile
It involves two things
1)Understanding of investment options, their returns and risks associated
2)Choosing from them based on investor profile
INVESTMENT OPTIONS
The investment avenues can be broadly divided into physical assets and financial assets . Real estate is best example of physical assets.They are easy to understand. However they are not as liquid( immediate encashability) as financial assets.
Financial assets are securities, which are held in the form of certificates as a proof of their investment. These are available various denominations( small amount to big amount), various durations( 1month, 1year, 10 years e.t.c) liquid, and easily transferable. They can be listed as:
a) Fixed Deposits of banks: Very convenient and accessable, Highly liquid, currently no income tax breaks, low rate of interest( 7% to 8%)
b) Bonds from IDBI, NABARD e.t.c, RBI Saving Bonds: Interest rate similar to banks, not available for less term less than 3 years, tax breaks are available.
c) Postal Schemes, NSC, Public Provident Fund: Tax breaks available, Interest rates higher(9%),
d) Shares, Mutual funds: All the top companies are growing at around 25% to 40% every year .Hence theoretically these things should deliver similar returns(or atleast 15%). However due to market pressures returns will vary and can be negative at times. With respect to mutual funds large cap funds give the same return as index(sensex, nifty) madcap and small cap funds can be higher than sensex return(or lower at times).Also sectoral funds can give higher returns than return from sensex(or lower at times).Needs continuous monitoring.
e) Insurance policies: Not really pure investment options. However a must for every investor as risk coverage.Whole life policies are available at very less premium(Rs 2500 per 10 lakhs) but without any returns during life time. Returns will be only around 6% if you choose a endowment policy.Stock Market linked policies are available but it is better to separate insurance from stock market investments.
CHOOSING FROM OPTIONS
Choosing from various available options depends on investor profile.Investor profile means
a) Age: A young person can try high return options like mutual funds and stocks since whereas persons nearing retirement should plan for time bound avenues and pension.
b) Earnings and savings flow:whether savings are expected regularly or once in a while
c) Tax status: Individuals for whom tax exemptions are available should consider post tax returns while evaluating options
d) Risk appetite: The ability to take risk and attitude towards risk –return relation of various options.
e) Short tem/ longterm cash flow needs: The cash flow required for any expected near term events should be planned through deposits/bonds.
f) Existing portfolio: To balance the risk return ratio of the basket of existing investments high risk or low risk assets may have to be added .
Based on the above factors, the investment advice varies from person to person and what is advisable for A may not be advisable to B.
For the above two steps an advise of financial planner may be taken but the ultimate decision should be taken by investor. Universal Banks(like HDFC) and financial supermarkets( like KARVY) provide such counseling free of cost.
