As an investor, one needs to understand three important things before investing hard-earned money. These three things more or less decide how safe an investment option is.
Risk Appetite: The amount of risk one is willing to take is termed as risk appetite. Higher the risk, higher the returns.
Time Frame: Time frame refers to the duration one is willing to invest for, keeping in mind volatility of the market and personal requirements and liabilities. Time frame includes short, medium, and long term investments.
Diversified Portfolio: Diversifying one’s portfolio helps to spread out risk in different types of investments. Diversifying helps in wealth management, as one can move funds between different investments, as per need and markets, without sustaining losses.
Good Return on Your Investment
Most investment advisers follow standardized formulas for calculating the proportion of investments one should make. ‘Start investing young’ holds true if you want to increase your returns, even in a bad market scenario. The following is one of the many formulas used to help one assess and understand the concept of safe investments.
Age Matrix Formula
Formula: 100 – age of the investor
For example: 100 – 30 (age of investor) = 70
Therefore, 70% of the total amount to be invested (wealth assets) should be put in equities and the remaining 30% in government backed securities.
A younger person can invest in a high risk market, as the age component makes it a relatively safe investment. The common misconception that has arisen due to the fall of stock markets worldwide, is that stocks are not safe to invest in. However, all long time investors know that for any stock or share to provide a good return, the money invested needs to be locked in for a minimum of 7 years. A longer duration of the investments eventually evens out the ups and downs of the market. There is no better proof of this fact, than the resurgence of the world stock market (though slowly), after a low of nearly ten months. Assets invested in government securities like fixed deposits, bonds, debentures, etc., are low risk investments that yield low returns, but assure that there are no monetary losses. Similarly, for an older person, particularly someone close to retirement, who needs regular income, it makes sense to invest more in government securities and less in stocks.
Types of Investment Options
Types of investments can be classified under financial and non-financial instruments. One can choose a variety of options to diversify the wealth portfolio. All investments carry risk with them, a thorough study of these investments, along with the company that one is investing in, is of extreme importance.
Equities are traded in stock markets. By purchasing an equity (shares or stocks), the purchaser becomes a part owner of the business. This form is a good long-term investment option, as the returns are generally higher than most other investments. However, greater returns also mean greater risks, so this has to be a long term plan. Being part owner of the company also entitles one to vote at shareholder meetings and receive profits (dividends).
Bonds fall under the category of fixed income group, and refer to securities that are founded on debt, for the purpose of raising capital. When one purchases a bond, it is like lending money to a private company or government. In return, interest is received on the money. Bonds are generally considered as safe, and the incoming interest is mostly stable. However, they come with risk, though a lot lower than others.
Mutual or Growth Fund
A mutual fund refers to a group of people, who pool their money together and have it professionally managed. They are set up with a specific strategy in mind, which includes a predetermined investment objective of earning higher returns. Mutual funds are a popular investment type, as one can invest low amounts monthly, and risk is diversified as the money is invested in stocks, bonds from government and companies, etc. This again is a long term investment and is subject to market risk.
Investing in banks, government schemes, post-office deposits, such as fixed deposits, recurring deposits, different plans, etc., are a very common way of securing surplus funds. However, these instruments give low returns as they involve very little risk.
Despite the fall in the real estate market in the United States, markets are predicted to go up again in the near future. The fact that land is becoming scarce, cannot be disputed. Hence, real estate is a profitable investment proposition.
While most markets were down, physical gold prices rose. In fact, this is the only commodity that has seen an upward swing in recent times. Besides physical gold, a number of products which derive their value from the price of gold, such as gold futures and gold exchange traded funds are also available for investment.
Safe investments are generally those that are well diversified, as they can help cushion the impact of a fall in the stock market. All investments should be done keeping in mind the age of the investor, and expected future liabilities. Consulting an analyst is a good option for those who don’t have a good enough understanding of investment options. If possible, one must study and research different options well, before investing in them.