PV Subramanyam, a Chartered Accountant by qualification, is a trainer in the financial services sector. After a 20-year career in the financial services industry, from equity broking, mutual fund advising, corporate finance advising and personal financial planning, Subramanyam turned to training. He writes regularly for financial websites and magazines.
'Forget stocks. Invest your money in buying a bigger bed. You can tuck away all your cash here', read an sms that I got the other day.
Funny I thought, but it really gives away what the world is thinking today. Everyone and his uncle are scared to invest their money!
"Should I keep all my money in cash? Is it the best asset class at this time?", is the question most of you are asking. Here is my analysis.
Cash has risk too!
Cash is surely one alternative but don't forget that there is a huge amount of risk. What risk? You might have a thief as a visitor and he can make a clean sweep (And the bed idea might not be a great one here!).
Besides, fire is another threat if you have cash lying at home. And we cannot rule out the possibility of natural disasters destroying your cash either.
And if all this isn't enough, then remember that inflation erodes the value of your money. So, idle money is inflation's delight!
Now that cash has been ruled out, here are some other investment options. But at this stage, are they worth it?
This is an attractive avenue for many people because they want to 'preserve their capital'. Banks pay anything between 3 to 11 per cent per annum as interest on the fixed deposits (FD). However, post tax and post inflation returns on FDs are either negligible or even negative. Hence, this is not a great option either.
If you think interest rates have peaked and will only fall now, you can keep your money in income funds. This is because when rates keep rising, the market value of securities that the income fund invests in, falls. This impacts the returns of these funds negatively. Similarly, when interest rates fall, the market value of securities increases, thus generating more returns for the fund.
But do you understand the rate scenario? Are you sure that interest rates have peaked? If you are not, then don't lay your bets here. It would only be a gamble.
| Income funds are debt funds which invest in bonds, government securities, commercial paper, debentures etc. These funds value their portfolio based on the market value of securities they hold. Depending on the market value, the fund makes losses or gains, which impacts returns on these funds. |
A popular news channel announced that property prices will fall by 30 per cent in the coming months, so it would be foolhardy to invest in property now.
If you think that real estate will give you a return in excess of the interest rates at which you are borrowing (for the next 20 years), then you can invest in this avenue. For instance, if you buy property with a home loan at 12 per cent interest and if you feel that your property will give you returns of around 15-20 per cent, you can think of putting your money here.
Again, for a lay person to understand how property markets move is like hitting darts with your eyes closed. And it's best to stay away from guesswork.
Equity (read mutual fund SIPs) rule the roost!
Experts on all the business channels seem to think that the markets are a bad place NOW to keep your money. Of course I find solace in the fact that the experts are only looking at a teleprompter and not at a crystal ball.
I must admit that I do not understand equity markets as well as the experts on television. However, I have kept my SIPs running and they have been on for seven to nine years. I do not intend stopping them. If you have a long term view, think Systematic Investment Plans. It cannot get better than that!
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