Which investment is best for you?

by J Victor on July 31st, 2010

This is one common question that wannabe investors ask. They want to know which type of investment is better for them in terms of returns. Before deciding what assets suites you best, you need to the following questions.

• How much money do you have ?
• How long are you willing to stay invested?
• How much risk you’re wiling to take?
• At what age do you plan to start investing?
• What’s the degree of liquidity (convertibility into cash) you require?

The first factor is your financial capacity. You can enter the field of real estate investing only f you have a lot of money, say at least 15 to 20 lakhs. That’s minimum investment at this point of time. Arts and antique investments will cost you even more. So these types of investments are not for a person with very limited funds. Such investors can think of investing in gold or stocks or mutual funds since the initial amount required is very less.

As a general rule, all assets grow in value as time goes. So it doesn’t really matter where you’re invested in. For example – If you had invested in the shares of Wipro 25 years back, very few real estate investments can surpass the wealth you would have made. On the other hand, assume that you had invested in a beach front property in Mumbai in the 70’s. 40 years later, the wealth that has been created would be huge. What would be your wealth had you invested Rs 100000 in gold in 1970? It was just Rs 184 for 10 grams in 1970; today it’s approximately 26,000 for the same. Imagine the money you would have made. So, in the long term, all assets would create wealth. How long are you willing to stay invested?

The age at which you start investing is another important factor to be discussed here. For example consider any of the examples above. If you were at the age of 50 when you invested. any of these investments would have grown in the same way, but by the time you achieve these results, you’d at 90 or even more. So that’s another point consider. If you’re investing for your next generation, age is no problem at all.

All investments carry risk. When you invest in an asset, it’s possible that its value may gyrate illogically. You should know how to handle risk and for that, you should asses you risk bearing capacity. For example, if you are not wiling to take any risk your only option is to invest in fixed deposits of banks, government bonds and gold.

We are listing down the pros and cons of different types of investments. You should be able to choose which works best for you after reading this.

REAL ESTATE-Comfortable Investment.

• Real estate investments involve huge amounts of money.
• Unlike stock, here you buy something which you can see and feel. You buy it after physically inspecting it.
• It’s a traditional investing option which everyone is comfortable with.
• It’s comparatively difficult to be defrauded in real estate investments.
• The property has to be safely guarded.
• As time moves on the land keep appreciating in value whereas the building it it keeps depreciating in value.
• You should be willing to wait at least 6 -10 years to get a solid return.
• Liquidity is low when compared to stocks. To sell a property, it may take 3 or 4 months.

GOLD Solid & safe investment:

• Gold is considered as a safe investment, an insurance against inflation.
• It’s a consistent performer.
• It’s difficult to store gold. Security is a major issue. Even if you keep gold in bank lockers, most of the lockers provided by the banks do not have insurance cover.
• You can start investing with little money.
• Gold investments can be done through ETF route. ETFs are instruments that invest in 99.5 per cent purity gold. Every unit of gold ETF you invest is euivqlent to 1 gram of physical gold. All you need for investing in gold ETFs is a demat account and a trading account with a broker.

STOCKS – The greatest wealth creator.

• In-spite all of the stock-market crashes, stocks are one of the greatest wealth creators for investors.
• Stocks give business ownership. For example, when you buy shares in Infosys, you are the owner of Infosys to that extent. You benefit from the company’s profits. The shares of highly profitable companies rise in value over a period of time.
• They also pay their shareholders a portion of their profits in the form of dividends and bonuses. Hence you benefit both ways- increase in value of the share and dividends.
• Diversification is easy when you invest in stocks.
• All it takes is a little investment. With as little as Rs 10,000 you can start investing in companies.
• Liquidity is very high. You can sell you shares in the secondary market within seconds and take your money.
• It’s easy to be defrauded in stock markets. The world’s best auditors may be in control, there may be strict laws that govern companies but still- It’s easy to be defrauded in share markets.

ART AND ANTIQUES: It’s complicated.

• Art and Antiques are interesting and profitable alternatives, but it is also extremely risky.
• Art can never be considered as financial asset.
• There are no proper yardsticks for measuring arts.
• It’s highly illiquid and there is no organized market to buy and sell arts.
• The investment required is very high.
• It would be very difficult to store and protect art pieces.

FIXED DEPOSITS:  Sure shots

• These are the most liquid form of investment.
• The return is already known and hence, you invest in it only if the percentage of return offered by the institution is agreeable for you. So, there no question of being dissatisfied with the returns.
• You can plan your finances according to the money flow expected.

YOU CAN ALSO BALANCE YOUR INVESTMENTS TO GET THE BEST OF BOTH WORLDS -

For example –

If you are someone who knows the real estate field well, you can invest in the shares of real estate companies-

By doing that, you take part in the overall real estate boom in the country (and not in a particular area’s price hike). If you need money urgently, those Stocks can be sold in a matter of seconds. It offers liquidity that no real estate investment can match.

Let’s assume you have shares worth 40 lakhs in DLF and you urgently need 2 lakhs to meet your parent’s medical bill. You can immediately sell 5% of your shareholding and raise 2 lakhs or you can pledge your shares and immediately raise 2 lakhs.

Instead, assume that your money was invested in one of DLFs apartment. Can you sell 5% of your Flat? No. The only option is to either pledge you’re flat or borrow money. Both takes time.

Having explained so far, now it’s your call.–Go ahead according to your budget, knowledge and risk taking ability! And don’t forget our 22 nd principle!

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