Today you have many options for investment. In fact the options are so many that one often feels
confused as to which is the ideal one! Most of us are also unsure of what important parameters to
consider before choosing an option. We often consider a few important parameters but ignore a
majority of the same. This article shares with you the important parameters that you may consider
evaluating before making any investment decision. Please note that we are not considering important
personal parameters like risk appetite, asset allocation, etc. here but only looking at parameters
from investment product point of view.
Time Horizon:
Time is of essence and among the most important determinants for
any investment decision. You may easily classify your investment time horizon into different
categories like for eg. (i) very short term; less than 3 months (ii) short term; 3 to 12 months
(iii) medium term; 1 to 3 years (iv) long term; 3 to 10 years (v) very long term; beyond 10 years.
As your time horizons increase, the risk nature of investments can increase from money market
instruments to short term debt to long term debt and then increasing portions of equity. Ideally,
for a long duration and a growing economy like India, equity asset classes offer much greater scope
of wealth creation.
Real Returns:
While evaluating returns expected from any investment, we often
only look at the returns mentioned or expected. However, we fail to take into consideration factors
like inflation and taxation upon these returns. As smart investors, we should always look at Post
Tax – Real Returns from any investment. To arrive at this is very simple. Firstly, take the
'gross' returns from an investment – say 8% for 1 year on Bank FD and deduct taxation from
this. Eg. If your applicable tax slab is 30% and the interest returs are taxable then the post-tax
returns are 8% less 30% or 5.60%. After post-tax returns, the next is adjustment for inflation or
price rise by deducting inflation from post-tax returns. Thus, if the inflation is at say, 8% today,
then the post-tax, real returns will be 5.60% less 8% or negative 2.4%. Thus, the our investment, as
given in example, in reality is going to give you a negative real returns on post-tax basis. This is
the recommended method to evaluate any returns for any investment.
Investment Risks:
Investment risks are of many kinds and would arise from (i)
markets (ii) nature of asset class (iii) product provider / manufacturer (iv) financial and
regulatory environment (v) political climate, etc. Given the nature of asset class, like physical,
equity & debt, the risks would vary in nature. Equity risks are mainly market, company &
sector driven. Debt risks are generally in nature of credit risk, liquidity, reinvestment, etc.
Tax Considerations:
There are four instances where tax incidence has to be
evaluated. First – at time of making investment if the investment is eligible for rebate or
deduction. Typically such investments would fall under section 80C, 80D, etc. Second incidence would
be the taxability of the income generated from your investments. Income can be broadly in form of
interest or dividend income. Third incidence would be that when any investment is redeemed or sold.
In such a case, the capital gains , long term or short term, would need to be calculated, depending
upon the investment horizon. Fourth tax incidence is that of Wealth Tax, which is more relevant of
high networth individuals. Investments can offer tax benefits to you on any combination of these tax
incidences. A smart investment decision would be one which will give the best tax benefits and
minimum tax liability from your investment.
Liquidity:
Investments can be futile if one is not able to liquidate it at
times of need or emergency. Surely, life is uncertain and we would not like our investments to be
blocked and unavailable when we need it. Liquidity would mean that you can get your investments back
easily, within short period of time and without incuring incurring too much of cost or sacrifice of
value while redeeming. An investment option offering high liquidity is preferred since one may not
only need it at times of emergency but also to make best use of any investment opportunities that
may crop up at any point of time. However, having said this, as investors we should be disciplined
enough to not liquidate investments often for non-critical or general expenses every now & then
just because we can do so.
Costs:
Different investment products have different types of costs attached.
Generally, any investment would have any combination of following three types of costs (i) at time
of investing new or additional money (ii) during period when investment is active as percentage of
investment value or fixed fees (iii) at time of exiting or withdrawing money. Typically we can
mention these costs as entry load / expense / exit load. The costs may be calculated as percentage
of amount or a fixed sum of agreed fees. Further, costs may be levied for distribution, transaction
services or advisory services. There would be also also be costs while making service or operational
requests, which are beyond the normal investment costs. Over time, the costs in many products have
fallen but still costs are a major factor to consider when one is investing large amounts in
products like PMS scheme, liquid funds, insurance products, etc.
Suitability:
There are customised products available in market directed for
specific purposes like pension, retirement, wealth creation, safety of capital, child education,
etc. Being clear with your investment objective can also be an imporant factor while considering
different options. It is however important to be careful since just naming products after some life
goals need not necessarily qualify as good investment for that purpose. You may need to weigh small
unique features that such products offer before comitting your money.
Convenience & features.
With improving lifestyle and penetration of
technology in our daily lives, we would prefer investment products that can be viewed & managed
online. While most financial institutions are now increasingly offering such services, off lately,
even government schemes & plans have begun such services. Further, one may also like to evaluate
other facilities like nomination, third party transferability, loan facility, acceptability as
security for loan by financial institutions. While these options may not be of very critical, it can
however be a differentiating factor for persons who intent to use these options.
Often the investment decisions made are not based on careful thinking or evaluation on all these
parameters. Decisions are majorly influenced by opinions of close friends, influencial persons in
family, recommendations by agents, brokers and even by smarter marketing by companies. Evaluating
investment options independent of these influencing factors on the parameters given above can most
definitely lead to long term financial well-being. If you are not in position of to evaluate these
factors yourself, you can surely ask your financial advisor these questions when required. After
all, being wealthy in life is not just about making the best investment decisions but also about
avoiding bad decisions.
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