When you look around for investments, there is a glut – of investment products, of products packaged as investments and products masquerading as investments.
However, when it comes to spending real money you need to have a right mix of investments. There is no one right approach towards investments, and there can be several approaches one can take. However, eventually it boils down to one number – what is the expected return on investment (ROI)?
For some products – like fixed deposits, it is fairly straightforward, and probably a good number to benchmark.
- Most of the banks offer 7-8% rate of interest for 1-2 year duration fixed deposits (actual returns can be lower depending upon tax you need to pay).
- PPF (Public Provident Fund) is currently offering 8% rate of interest
- Employee Provident Fund (EPF) offers 8.55% rate of interest. If you are a salaried employee you can also top up your EPF (Employee Provident Fund) by your own contribution.
After the initial lock-in period, withdrawals from EPF and PPF are tax free.
Debt & liquid funds (at current rates of interests) can be expected to give around 8 percent rate of interest. Fair assumption?
So, if the interest rate doesn’t deviate much, you can expect around 8 percent rate of returns from a mix of debt instruments (depending upon the mix of products). If you are evaluating other investments, it may be a good idea to benchmark it against this 8 percent rate of returns and seek higher rate of returns. And you need to account for risk too. So an expected 8% returns on a risky asset may not make the cut, but an expected 10% returns may make it.
Do your own math, align your expectations and act.
Here are my thoughts on some of these investments.
Equity/ Mutual Funds
Historically equities (including equity mutual funds) have been the best performing asset class and have given early double digit growth rate. If the prices keep pace with earnings, it will hopefully give a good (hopefully a double digit) growth rate in future too. But, it may not always be the case. You need to also consider the price/ valuations you are looking to buy at, especially for medium term. SIP may help to mitigate the risk, but you can do well to consider valuations if you are considering a lump sum, medium term investment. (in long term, it may, hopefully not matter much)
Also, leave aside trading & potential money you can make through it if you are looking to calculate ROI. Anyway, very few people actually make money via trading, and even lesser make money consistently.
(You may also be interested in – Great Expectations – Being “OK” even with moderate 15-20% returns)
If you expect a rental yield of 3%, you’ll need to look at an annual growth in its value at 5% percent to match the 8% ROI above. Now, when you account for maintenance (monthly maintenance & repairing regular wear and tear as the building becomes older), non occupancy, illiquid nature of the asset, cost of registration etc. expected ROI ought to be higher. On the other hand you get tax benefits also (in addition to Section 80C benefits, which you get with PF, PPF etc. also). If it were up to me, I’ll look at a ROI of at least 10% on the landing price (price including registration/ stamp duty) to consider real estate as an investment. Suggest that you make your own assumptions, do your own math and arrive at a number.
(You may also be interested in – Should you invest in Real Estate in India)
Insurance is not investment, It is a risk management tool. look at it that way. An insurance product offering risk management and growth will be inefficient vis a vis corresponding mutual fund + term life cover.
At the same time, ROI yardstick may not be applicable to health insurance or term plan. If situation demands, they may be immensely helpful. But if you don’t need to use it, it is probably a good situation to be in!
If recent history is anything to go by, gold or silver as a n investment may not be a very great idea. But some day, who knows, it may work. But do you expect it to give >8 percent annual returns?
No idea … I never understood it!
It is good to diversify your investments & different investments can give different rate of returns. The fixed deposits/ PF/ PPF returns above may also not be sacrosanct and change over a period of time, depending upon the direction of the economy and economic indicators.
At the same time, once you have a basic degree of diversification, there can be one go to investment product for you if you have surplus money. What will that be?
Disclaimer – The purpose of this post is not to provide any investment advice, but highlight the importance of calculating expected ROI while investing & review the assumptions. One is supposed to make own judgment while investing.