With Stock Markets reeling under a lot of volatility, and the Indian Rupee depreciating against most major foreign currencies (esp against the US and Singapore Dollars) the outlook for the Indian Markets is not so green right now. As of now, the big question that is in peoples minds is “Where can I Invest my Money Now?“ Should I take a risk with the stock market or should I go for bank deposits? If you are someone who has had these questions pop-up in your mind over the past few months, this article is just for you...
Before We Begin
Before we begin answering the question, where to invest our money, we have to decide a few key aspects...
1. Decide How Much You Can Invest
2. Decide When you want the Money Back
Rationale: With the knowledge of when you want the money back, a wise decision can be taken
Point No. 1 is just a technicality to try to understand how much money we have to invest. It is not going to affect our investment decision much. But, Point No. 2 is going to be the key player in our decision.
The rest of this article is going to be about where to invest based on the timeframe as to when you want your money back. The details are split into four sections:
1. Ultra Short-Term (Less than 6 months)
2. Short-Term (6 months to 1 year)
3. Medium-Term (1 to 3 years)
4. Long-Term (More than 3 years)
Ultra Short-Term (Less than 6 months)
When you need your money back in the immediate future i.e., within the next 6 months, safety and security of the money invested takes highest priority. Lets say, you have some money that you have saved up for your Son’s Engineering College Admission in June of 2012 (It is January 2012 now) the most important consideration for you is, will the money be available for me when it is time to pay my Son’s college admission and fees. So, at such a scenario, investing in the stock market would be suicide and you may or may not be able to pay his fees using this money. So, the best Investment Options for an individual who plans on using the invested funds in the near future are:
1. Liquid Cash in your Savings Account – This is a wise choice if you need the money in a time period of less than 3 months. The whole hassle of opening a fixed deposit, breaking it a few days before you need the money, paying a penalty for premature withdrawal etc can be avoided. You can withdraw the money anytime you want. The Rate of Interest you earn is only going to be around 4%.
Justification: Even though your money is earning only 4% interest, your money is fully secure and available whenever you need it. So, this is the best choice for someone who needs cash in the immediate future.
2. Bank Fixed Deposits – This is a wise choice if you need the money in a time period of anywhere between 3 to 6 months. Your Money does not stay idle. With the current high interest rates offered by banks on fixed deposits, your money is going to earn a good income eventhough the duration is only around 6 months or lesser.
Justification: Your money is going to be safe because, banks in India are very safe and strictly regulated by the RBI. Moreover, your deposits will earn an interest of around 6-8% which is very good considering the kind of returns the stock market has offered over the past few years.
Short term (6 months to 1 year)
When you need your money in a time duration of between 6 months to 1 year, your choices of investment are a bit more diverse because, apart from capital preservation, the rate of returns the instrument earns is going to be a key criteria (unlike the ultra short-term where capital preservation was our main goal)
1. Fixed Income/Debt/Bond Mutual Funds – These days, there are a whole bunch of Debt and fixed income MF’s that are available in our market. These are MF’s that invest only on debt instruments (like bonds) and so, the principal invested is almost 100% safe. Moreover, since they invest in bonds from Corporations & other large organizations, the rate of returns is going to be greater than what is offered by Bank Fixed Deposits of equal tenure.
Justification: Even though these MF’s invest only in Fixed Income/Debt Instruments, default risk is a very real probability. But, the chances of that are less than 1 or 2%. Since as an investor you are bearing this 1 or 2% risk, the returns are usually an equivalent 1 to 2% higher than what Fixed Deposits yield us. So, this is a good choice for people planning to invest their money for a duration of between 6 to 12 months.
To know more about Debt Mutual Funds Click Here
2. Bank Fixed Deposits – The rates of interest offered by banks these days for deposits between 6 to 12 months timeframe are in the range of 6 to 10%. To add on, the deposits are 100% safe.
Justification: Safety, combined with good returns of around 8% makes these a very good choice. This is for the totally risk averse investor. If you are someone willing to take a small risk for a better reward, then option no.1 would be a better choice.
Medium term (1-3 years)
When you need money in a time duration of between 1 to 3 years, you have the opportunity to take a decent amount of risk to take advantage of the good returns offered by the Stock Market. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.
1. Balanced Mutual Funds – These are Mutual Funds that Invest in both Debt and Equity Instruments. Well managed balanced funds move their assets between equities and debt to provide the best possible returns to the investor. They usually invest around 60% of their assets in debt instruments to provide capital preservation and invest the remaining 40% in the equity markets to provide far better returns than traditional debt instruments like bank deposits or debt MF’s.
Justification: Though Balanced MF’s have lost some value (In NAV) over the past year due to the turbulent markets, they havent done as bad as the Equity Diversified category of funds. This is because of the healthy allocation to debt instruments. So, if you are an investor with a medium term timeframe of 1 to 3 years, these would be a good bet. Even if the markets remain turbulent in the near-time future, it will definitely recover over the next few years and you can reap the benefits of the equity allocation of such funds.
Trivia: Last month we had taken a look at one of the best Balanced Mutual Funds in India "HDFC Prudence Mutual Fund". To know more about this fund Click Here
Long term (3 years or more)
When you are planning for a long term investment, you have the opportunity to take calculated risks to take advantage of the good returns offered by the Stock Market & Other Asset Classes. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.
1. Diversified Equity Funds – These are Mutual Funds that invest directly in the Equity/Stock Markets. They invest predominantly in blue-chip or large cap stocks and also select a few good mid-cap or small-cap company’s to provide the best possible returns to the investor.
Justification: Diversified Equity MF’s have taken a significant beating over the past year due to the volatility in the stock markets. Experts suggest that, this is the best time to enter the market due to the cheap valuations. Fund Managers of well managed funds are using this opportunity to rejig their portfolio to best suit the investors. Considering our timeframe of 3 years or more, equities are our best bet and as always, no other asset class has outperformed equities on overall returns over the past decade. So, investing in Equities is a wise choice for the long-term investor.
2. Gold – Gold, the shining yellow metal has been increasing in value for the past few years and is expected to do so in the future as well. Though, the price may be volatile in the short term, overall the price of gold will only go upwards because of the supply-demand parity. So, gold too would be a good addition to your long term investment portfolio
Tip: If you decide on investing in Mutual Funds (Balanced or Equity Diversified) Systematic Investment Plans (SIP) are the best way to go. Since the markets are very volatile these days, investing regularly helps average out the high’s and low’s of the market and get the best returns
There have been numerous articles in my blog about investments & forming an investment portfolio. You can read them by clicking here