- Factors to consider while selecting the best investment options
- Why is choosing the right investment option important?
- Types of investment options
- Best investment options in India for 2021.
- Investment plan for goal-based wealth creation
Factors to Consider While Selecting the Best Investment OptionsWhile planning your investment, you need to figure out the right investment option which fits your risk tolerance and financial goals. It should give you the desired return while also achieving your financial goals. Below are the factors that you should take into consideration while selecting the best investment option:
1. LiquidityLiquidity is how quickly an asset can be converted into cash. But why is liquidity important while selecting the best investment option? Liquidity is important simply because:
- Short-term goal = Invest in highly liquid assets.
- Long-term goals = Invest in low-medium liquid assets.
2. TenureThe tenure of your investment is the time for which you hold your asset to get maximum returns out of it. Why is it important to look at the tenure of investment?
- Short-term goal = Investment options with a short-tenure.
- Long-term goal = Investment options with a long-tenure.
3. DiversificationEach investment option has a certain amount of risk involved, and diversifying your investment portfolios helps in minimising risk. As a popular saying goes, “ Never put all your eggs in one basket”. Regardless of the tenure of your investment, you should diversify your portfolio by investing in various asset classes.
4. Risk appetiteThere is a direct relationship between risk and return on investment. Why is it important to check your risk appetite before investing? Every individual has a different amount of disposable income for investment. According to the disposable income available, you must decide for yourself whether high-risk, low-risk or medium-risk investment options will suit you the best. Generally, higher the risk appetite higher the return and vice versa. Hence, you should know your risk appetite and choose the best investment option for yourself. However, risk can be minimised by proper planning, research and diversification.
Comparison of Risk Categories
|High risk||Medium risk||Low risk|
|Meaning||High risk investments are for investors who want to earn high returns and can afford to take high risk.||Medium risk investments are for investors planning to invest for long-term with moderate returns, usually around 7%-10%||Low-risk investments are for investors who are planning for safe investment with steady returns.|
|Tenure||10 years +||3 - 5 years||1 - 3 years|
|Risk-Reward ratio||High||Moderate||Low - moderate|
|Investment options||Stocks, small-cap, mid-cap and commodities.||Large-cap, balanced funds, real estate, bonds||Government bonds, government schemes, Bank Fixed Deposit.|
5. Investment ObjectiveBefore you start investing your hard-earned money in any instrument, you need to determine your investment objective. Why is it essential to know your investment objective? When you are planning to invest, you need to have clear investment objectives, such as: Short term goals:
- To save tax
- To plan for vacations/vehicle purchase, etc.
- To fight inflation
- To increase saving
- Buying a home
- Child’s marriage and education
6. AgeAge is one of the most important factors that you have to take into consideration before selecting your best investment option. Why is it essential to consider your age before investing?
- When you are young, you have very little to lose and you do not have many responsibilities, so you can go for high risk investment options.
- For senior citizens, it is advisable to go for low risk investment options.
Why is Choosing the Right Investment Option Important?Choosing the right investment option will reap you good profits in the future and also help you accomplish your investment objective. It is not rational to invest in any instrument just for the sake of investing. You need to take into account factors such as your goals, investment objective, risk appetite, etc. If you take into consideration all the above factors while investing, you will surely create wealth for your future.
Types of Investment OptionsInvestments can be financial investments and non-financial investments.
- Financial investments are market linked and include stocks, mutual funds and even fixed income products like PPF account, Bank FDs etc.
- Non-Financial investments cannot be traded in the financial markets and its value is derived by its physical net worth. Example: Real estate, Gold etc.
Best Investment Options for you in 2021
1. Direct equity (Stocks)
|Who can invest||If you want to maintain liquidity and make quick profits.|
2. Equity mutual fund
|Tenure||Long - term|
|Who can invest||If you are looking for a long term investment option with moderate risk.|
3. Debt mutual fund
|Tenure||1 day to 7+ years|
|Who can invest||If you are looking for comparatively less risky options than shares.|
4. Public provident fund
|Tenure||15 years lock in period|
|Who can invest||If you are planning to invest in safe investment options for a long duration.|
5. Fixed Deposit
|Tenure||7 days to 10 years (premature)|
|Who can invest||If you have a lump sum amount to invest for a fixed period.|
6. Real Estate
|Who can invest||Investors invest with the view of future appreciation of the property.|
|Risk-Reward ratio||Depends on the location of the property.|
- Capital appreciation of the property.
- The rent earned from the property.
|Who can invest||If you wish to diversify your investment and want to hedge against inflation.|
8. Sukanya Samruddhi Account
|Who can invest||Parents of a girl child who wish to save funds for her marriage and education.|
9. National Saving Certificate
|Who can invest||If you want a tax saving investment|
10. National Pension Scheme
|Tenure||Matures at the age of 60|
|Who can invest||If you are looking to save money for your retirement with tax benefits, then this investment option is for you.|
11. Recurring Deposit Account
|Who can invest||If you are looking to save in a systematic manner.|
12. Money Market Funds
|Who can invest||Investors who want to earn more than savings account without taking risk.|
Here is a quick summary of all the investment options available for you!
|Investment Options||Risk Types||Tenure||Risk- Reward Ratio|
|Direct equity||High||Long term||High|
|Equity Mutual Fund||Moderate-High||Long term||High|
|Real Estate||Moderate||Long term||Depends on the location of the property.|
|Debt Mutual Fund||Moderate||Medium-Long term||Moderate|
|Fixed Deposit||Low||Medium- Long term||Moderate|
|Public Provident Fund||Low||Long term||Low|
|Sukanya Samruddhi Account||Low||Long term||Low|
|National Saving Certificate||Low||Medium term||Low|
|National Pension Scheme||Low||Long term||Low|
|Money market funds||High||Short term||Low|
|Recurring Deposit Account||Low||Short term||Low|
As a bonus, here is a basic investment plan for goal-based wealth creation
|Goals||Remarks||Suitable Asset Class|
|Emergency funds||Emergency Funds Amount = Your monthly expenses including household expenses, leisure, EMIs etc X 6 months||Fixed Deposit, Liquid Funds|
|Buying house||You can accumulate funds for downpayment which is generally 20%-30% of the property value.||SIP in Mutual Fund + SIP in Blue chip stocks|
|Child’s education||Child’s higher education is getting expensive these days. So, from the year your child is born you should start saving and investing through SIPs in various asset classes.||SIP in Mutual Fund + SIP in Blue chip stocks|
|Retirement corpus||If you wish to retire early, you have to plan your retirement journey well in advance. Saving a small amount of money in a systematic manner today will reap good returns in the long run.||SIP in Blue chip stocks|
|Buying a car||Instead of taking a vehicle loan, plan for buying a car without any financial burden||Fixed Deposit + Recurring deposit|