Investment Opportunities...and the Risk Options

Risk Options:

Before anyone searching for high return options, one should assess the risk appetite viz... The ability to take risk and the willingness to take risk

Many financial advisors also take into consideration the major factors that determine the style of investment and the model of portfolio to be designed. The factors include the financial goals, financial stability, age, requirement of funds on emergency cases of the individual like, ex: A person needs to pay for his daughter’s education fee at the age of 21; his investment horizon is almost long

Let us come back to the terms…ability to take risk and willingness to take risk, both seems the same meaning but not

Willingness to take risk – Describes the emotions and attitude towards taking the risk, it could be high risk, medium risk and low risk

Reaction to short term volatility of markets and at different stages like bull market, bear market- That demonstrates your willingness

Ability to take risk – Affordability of the investor, the salary, assets and investment horizon

Example: A person with age of 20 may take high risk and a person with age of 50 may go for low risk and find the investment options like fixed income securities

And if you have more wealth, you can take more risk and vice versa

Risk Management – One of the greater tools one can have is DIVERSIFICATION; too much diversification also leads to too little return which has to be planned well

Return Options:

Once you have decided where you stand in the risk profile, you have to search for Return Options

Selection of Return options also varies depending upon some factors other than Risk options mentioned earlier that include Liquidity and taxation also

(But we are not going into deep of what taxation influences here – My view is Tax planning has to be made based on the Investment Opportunities but one should not plan his Investment Opportunities by looking into the Tax benefits. Example In India, Government gives 80C deduction for making deposit into PPF which gives 7-8% return and ELSS funds which gives 12% , which could be eaten away by inflation, So don’t be ignorant and be foolish)

Let us discuss some investment options

First I will go with Equities

Equity Investments:

All the way, equities are the best asset class investments across all other asset classes, since the macro economic factors are also improving,

Once can look into the equity markets with a time horizon of 5-10 years

In Equity markets there are major three categories based on market cap includes Small cap, mid cap and Large cap stocks

If you see the Sensex has generated more returns than other asset classes

However every class has its own risk feature but diversification can help you to manage it

Time spent in the markets is more important than timing the Market

Mutual Funds: There is no major difference between the equity investment and Mutual funds, the only difference between them is, the funds are managed by Portfolio manager, who can analyse and invest and even charge an extra management fee

If you have large amount to invest and no single hour to analyse – you can go for it

If not – Just sit and analyse, do your own due diligence. Your investment horizon for equity investment should be 5- 10 years (for both Mutual funds and Self investment), can’t you sit for One day, One week, One month to analyse it... Think about it

Investment is simple but not easy -- Buffet says

Fixed Income Securities – Fixed Deposits

You can invest in Bank Fixed Deposit of your respective bank, even a layman can do that.

There are other corporate schemes too, here are some

Source Economic times

But these tend to have high risk and Even DHFL, LIC HFL also offer 8-9% Interest rates

Fixed Income Securities - Debt Funds:

Generally big corporates does this, because they are in between the high risk options like equities and low return options like fixed deposits

One can look at these funds for medium term like one to three years, because the longer the period the greater risk it has towards the Principal amount

Note: Sahara Scam – case of Fully Convertible Debentures almost Rs.24000 Cr

Lending:

This is a routine in some village areas where people lend money to their neighbours or some known people who is in need of it

Once can get 2% Interest rate per month based on the risk profile of the borrower

But this is the riskiest option; I would suggest not going for it. Those who have a lot of experience in such business only can do it because collecting interests and recovering principal is a hectic job

My views may be biased towards equity instruments, please use your own judgement towards investing

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