Where to Invest our Money Now?

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

Happy Investing!!!

Four Reasons to Buy Gold

For ages gold has been one of the most sought after investment option for people. Be it investors like us or women of the household, gold has been one of the top priorities. Gold analysts have been boasting of the potential returns gold can provide over the past few years. Gold prices have been in an upswing ever since the market started to go down. The price of gold was Rs. 9,000/- for 10 grams in 2007 and Jan 2008 it was more than Rs. 10,000/- Last month the price of gold was nearly Rs. 15,000/- for the same quantity 10 grams. This is the all time high the price of gold has touched. Even now our gold analysts are continuing with their buy advice.

Gold is the only asset class that has provided consistent positive returns over the years. Especially in such testing times it has outperformed all other asset classes including the stock markets and real estate. Analysts feel that the price of gold would touch Rs. 18,000/- for 10 grams by the end of this year 2009.

Below are 4 compelling reasons for us to consider gold as an investment option for this year.

The Global Economy would remain affected

The world economy is in serious trouble and is likely to remain the same in the forthcoming months. The global growth forecast for this year is less than 1%. This is slowest growth forecasted in the global economy. We expected the growth to be around 2% for this year last year but our forecast proved to be wrong. A realistic estimate would be around 0.5 to 1%

In such difficult times gold becomes an automatic choice for our investors. Investors are searching for safe havens for their investment and with the kind of capital preservation gold offers; it is the number one choice. Some top mutual fund managers are worried about the trend in the market. Investors are buying gold like there is no tomorrow. This has further impacted the slowing economy and stock markets.

Because of the activity in the Gold ETF markets and the commodity markets the price of gold is constantly going up and a price of around 17,500 – 18,000 seems to be very possible.

US Dollar may depreciate against global currencies

The price of gold and the value of the dollar have an inverse relationship. If the value of the dollar drops, more dollars would be required to buy the same quantity of gold. So the value of gold stays unchanged but the devaluation of the dollar pushes its price up. If the dollar declines against other currencies it would decline against gold as well. This negative correlation may not be so evident on a daily or weekly basis but this would be very significant when checked on the long run.

Some analyst’s world wide feel that the US government may resort to printing more money in the coming months to tide over the financial crisis. This may have a negative impact on the economy. This could push up inflation and cause the price of the dollar to slide further. This would naturally push the price of gold further upwards.

Crude oil prices could bounce back to $65 a barrel

Gold and crude oil prices always move hand in hand. At least that is the general trend over the years. When the price of oil goes up it leads to high inflation which in turn makes gold an attractive investment option.

In July 2008 we saw oil touch an all time high of $147 per barrel and then it started slipping. The fall in crude prices was because of heavy drop in demand in the second half of 2008. In spite of this correction and its price reaching around $40 per barrel now, gold is still going up.

Analyst’s world wide feel that the price of oil may bounce back and reach around $65 - 70 per barrel. This puts gold in a sweet spot. It will be a good hedge against deflation if the economy does not improve and at the same time, it would be a good investment option to counter inflation. Either ways the price of gold would go up.

Global Demand for Gold would Exceed its supply

The demand for gold is around 3500 tonnes in a year. This includes gold required for jewellery, the commodity markets etc. but the production of gold is only around 2500 tonnes which brings us to a situation where there is a straight excess demand of nearly 1000 tonnes. Also gold mining countries worldwide are cutting down on their production owing to fears of the global recession. This would further fuel the demand for gold and its price would continue the upward movement.

What should we do now?

Don’t buy gold right away. Experts are expecting a correction in gold prices due to profit booking. Also there is a certain seasonality in the price of gold. Usually gold prices tend to peak out in March and then fall a bit before resuming its upward journey. So buy only 10-15% of what you plan to invest in gold and then wait for the correction. Once the correction happens, buy more. Buy in a staggered manner and do not invest all your money in one shot.

Also remember the importance of asset allocation. No asset class should have an inordinately large part in your investment. Decide on proper asset allocation and make sure that the fluctuation in prices of one asset does not affect the value of your portfolio heavily. An ideal allocation for this precious yellow metal would around 15% of your portfolio’s worth.


Happy Investing!!!

Gold as an Investment

The concept of buying/holding Gold has been followed for ages. Gold has been one of the most sought after precious metals for generations and people have been crazy about owning gold always. In olden days the amount of gold possessed by a king signified his power. In the modern times the amount of gold in the reserves signifies the strength of a country's economy. It is an unsaid truth that Gold symbolizes wealth.

Gold as an Investment option is very attractive. When I was in my school my mom used to buy 10 grams of gold at the price I get her 1 gram now. That is how much the price of gold has gone up in the past 10 years. Also, gold is a limited resource. In India especially we do not have many gold mines that have been able to consistently produce as much gold as some nations around the world are producing. So considering these 2 factors Gold is a very attractive and a comparatively safe investment option.

What kind of returns you can expect from Gold?

The typical returns from Gold would range from somewhere around 10% or even more year on year. The amount of increase in the price may vary based on a variety of reasons but the consistent upswing in the gold prices is happening for years and would continue. Also it is a safe investment option where your gold is worth as much as the price of gold in the international market. It is not as risky as the stock market and hence the risk of holding gold is very minimal.

What affects Gold prices?

The price of gold is ultimately driven by the Supply & Demand theory. When the demand for gold exceeds the supply the price goes up. Yearly 2500 tonnes of gold is mined all around the world and the demand for gold is approximately 3500 tonnes. This means the demand for gold is a 1000 tonnes more than what is being mined all over the world. This translates into a steady increase in demand as well as the price of gold.

In general gold becomes a very favorable investment option during some situations like Economic Crisis, Depression, Recession etc. During these periods the returns on investment on other forms of investments like Stocks, Mutual funds, Real estate etc is negative. During such times the demand for gold goes up heavily. People take out their investment in other avenues out of fear of loss and invest into safer avenues like Gold or bank deposits. This causes the price of gold to go up drastically. The price of gold per 10 grams has gone up by nearly Rs. 1000/- in the last 6 months.

Methods of Investing in Gold:

The various methods in which one can invest in Gold are:

1. Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers which provide the same service. Bars are available in various sizes, for example in Europe these would typically be in 12.5kg or 1kg bars, although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1 Tola.

Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a vault on your behalf). Banks in Switzerland offer this service of holding gold in Vaults on your behalf.


2. Coins

The most common way of investing in gold is by buying gold coins. These coins are available in jewelery shops all over the country. They come in weight ranges starting from 1 gram and are usually in the sizes of 1g, 2g, 4g, 8g. This is ornamental 22 Karat gold that is bought and sold at the price of gold in the international market.

Of late many banks in India are selling gold coins with certificates of purity and genuineness.

Note: The coins sold by banks are 24 Karat gold. They are sold at a premium when compared to the market price of gold because of the cost involved in packaging and certification of the gold. Most importantly banks would not buy back these gold coins. You would have to sell them at the nearest jewelery shop. You might lose a little money in this selling process.

3. Exchange Traded Funds

Exchange Traded Funds are the latest means of investing in Gold. Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was lunched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold which is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market.

Many investors who wish to hold gold on a long term basis find the Exchange Traded Fund method to be expensive as annual costs can range from 0.40% to 0.50%. For investors holding gold over the long term these costs add up. The major difficulty is that the costs are deducted as a reduction in physical bullion held. Thus the investor not only pays each year but loses the future performance of the bullion that has been deducted.

Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. Economies of scale, liquidity, and ease of purchase and sale make ETFs an increasingly popular method of investing in gold.

Benefits of Investing via Gold ETF's

1. You can buy quantities as small as 1 gram
2. You can buy them at the convenience of your home/office. All you need is a system with an internet connection and a valid DEMAT account
3. You need not bother about safeguarding your gold. The ETF provider takes care of it
4. You can sell it on any working day when the markets are open


UTI Gold Exchange Traded Fund

On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The objective of UTI Gold Exchange Traded Fund is to endeavor to provide returns that, before expenses, closely track the performance and yield of Gold. Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be credited to investors’ demat accounts.

Furthermore, there are many more ETF's HDFC Gold ETF, ICICI Gold ETF, Benchmark GoldBees etc are gold based ETFs that invest in gold and can be bought and sold as shares.


Happy Investing...