Where Should I Invest My Money?

Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka “Rising costs” eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation.

So, if you want to have non linear returns from your money, shares aka stocks is the only long term way that has delivered returns to WISE investors over the years. The term wise is very important here, as the difference between returns received by the best and the worst investors are as different as the sky and the earth. Here are some points to ponder:

Even if you invest in an index, you generally get better returns than debt over a long term. E.g. BSE Sensex has grown about 15-16% per year over last 10-12 years. There have been some years when it has grown negatively, but that’s why it is recommended to invest in equity for long term, for most people, who can’t give much time to making investment decisions. The difference between a 16% per year return and 7% per year return is quite significant. 10,000 Rs. become nearly 2 lakhs over 20 years with 16% returns, whereas with 7% returns, they only turn into 3.8 lakhs in 20 years.

Also don’t forget the dividend yield that you get. It is a nice bonus that you can use to reinvest your money.

Of course, what matters is “Choice”. If you could pick an Infosys or a Bharti Airtel 10-15 years ago, you would be filthy rich even by investing smaller amounts in these scrips.

4. Picking losers – There is of course a risk factor to equity. For example, if you had bought DLF in early 2008, it was trading at around 1000 Rs. and now it languishes at around 300 Rs now, after 2.5 years. So your sum of 100,000 would have become a measly 30,000 Rs! In the same period, a 7% FD would give you a relatively healthy total return of around 1,18,000 Rs.

For most people, mutual funds are a safer route. They generally can’t give you muti-bagger returns, but can outperform the basic index (Sensex or Nifty) over the long term. But, even in MFs, there are winners and losers.

The truth is, whatever the marketers may tell you, that a lot of people make wrong decisions in markets, and lose money. Only a handful of companies become “blue chips” over the long term, and the choice of what you buy matters a lot.

If you like doing your own research, you should stick to some basic principles, like thoroughly reading annual reports of companies before investing. At least thoroughly read some brokerage reports before making the decision.

Mutual funds is a relatively safer avenue, but it doesn’t mean you can put your money in any fund or scheme that “the sales guy” recommends. You need to research the funds by looking at NAV charts, the exit loads, and most importantly, what kind of fund it is. It also depends upon your risk appetite.
Source: http://www.financialnewsline.com/