First-time investors often find it difficult to choose the right option.
Sanket Dhanorkar, ET Bureau | Nov 18, 2013, 05.59AM IST | Economic Times
First-time investors often find it difficult to choose the right option. Sanket Dhanorkar helps you navigate the unchartered waters.
It is not an easy time to be an investor. Even though you may be spoilt for choice, there is a high degree of volatility across asset classes. This means that one has to be extra cautious while choosing investments. Whether you are opting for equity, fixed income, property or gold, the current environment will punish you for rash or untimely decisions. For those who have just started saving, taking the initial steps into the world of investing is even more daunting.
For first-time investors, identifying the right initial investment can be a challenge. Where should I begin? Should I play safe and invest in a fixed-income instrument that offers guaranteed returns? Should I go for high-growth investments like stocks or equity mutual funds? You have to be careful with your choice to ensure that you begin on a solid footing and build a stable foundation. It should provide a sense of confidence as you move ahead. As Lao Tzu, the Chinese philosopher, said, ‘A journey of a thousand miles begins with a single step.’ Here’s a helping hand as you take your first step.
For some, investing in stocks is akin to gambling in a casino. However, people have also made fortunes from stocks. Some of your friends, relatives or acquaintances will recount their experiences of doubling or trebling their money within a short span of time. Naturally, this gets you thinking. Should I try my hand at the stocks game? How can I make handsome gains from equities? More often than not, you take the plunge. You open a demat and trading account, and make your initial purchase—possibly a strong blue-chip company that you admire, or an emerging company you have heard a lot about. Either way, this may not be the ideal route for everyone.
Why to invest
When you invest in stocks, make sure you do so for the right reasons. If you are looking to make quick gains and exit, then you are setting yourself up for long-term pain. Unless you are able to time your entry impeccably, you cannot earn good returns consistently. Equity is an asset class that rewards you the most if you stay invested for a reasonably long period of time. Hemant Rustagi, CEO, Wiseinvest Advisors, urges investors not to treat it as a source of excitement. “Stock investing is not a gamble. It is a serious investment opportunity,” he says.
Where to begin
Test the waters before jumping into the deep end of the pool. Mutual funds are the ideal starting point as these take care of the problem of picking the stocks yourself. Neeraj Chauhan, CEO, Financial Mall, insists, “For those just starting out, it is better to leave stock-picking to a professional fund manager.” Within mutual funds, first-time equity investors can opt for hybrid funds to get a taste of equities. Debt-oriented hybrid funds typically invest a chunk of the money in debt instruments, with a dash of equity thrown in. An equity-oriented balanced fund will take you on a learning curve. Those who can take on some risk can even opt for a diversified equity fund or an ETF. Srikant Meenakshi, director, FundsIndia, says, “Those who are easily discouraged by market volatility, but want a flavour of equity in their portfolio, should consider a balanced fund.”
If you are keen to dabble in stocks, be ready for some heartburn. The first few picks will give you an understanding of the market. Even if you make mistakes, you will learn from the experience. However, put in only small sums initially. If your stock picks turn out to be winners, don’t be tempted to throw in your entire money in search of more such gains. The market has a way of bringing you down just when you start to think that only the sky is the limit.
Most people prefer to play it safe while making their first investments. They usually put their first savings in a fixed deposit with their bank. Debt instruments offer assured returns, are easy to understand and do not require as much homework as equities or real estate. This asset class offers multiple options to the investor, each with its own unique features. This may lead to confusion for the newbie investor.
Why to invest
Fixed-income products are the cornerstone of an individual’s investment portfolio. Whether it is the humble bank fixed deposit, the PPF or a government bond, these provide stability to your portfolio. Experts concur that any asset allocation plan should include fixed income or debt. Pankaaj Maalde, financial planner, Apnapaisa .com, says, “Every portfolio should have an allocation to debt to ensure a solid foundation.” Even the most sophisticated, risk-savvy investors would do well to put a part of their money in debt, which would protect their portfolios from a sudden fall in the riskier asset classes.
Where to begin
Be clear about what you want when you invest in debt. If you are looking for a regular stream of money and the preservation of capital, then a simple fixed deposit that pays interest every month or quarter makes sense. If you do not need the regular inflow, choose the cumulative option of the fixed deposit or go for NSCs. The PPF is a long-term investment that locks up your money for 15 years. Simply leaving your money in safe, fixed-income instruments is not a productive long-term solution. You will be lucky if you beat inflation with these investments.
The tax incidence is another important point to consider. Chauhan argues, “For those in the higher tax brackets, it makes more sense to invest in instruments that give higher post-tax returns. For those in the lowest tax bracket, investment in fixed deposits is a good idea.”
However, to get more out of fixed income, you will need to move a bit higher up the risk ladder. Bond funds and FMPs provide a good alternative to traditional instruments as these can offer decent capital appreciation, even though the returns are not guaranteed.
With gold prices going through a multi-year rally, investors have started looking at the metal as another asset class in their portfolio. However, many people have given undue importance to gold as an investment. First-time investors are at risk of putting their savings in the asset for all the wrong reasons.
Why to invest
Gold is seen as one asset whose prices can never go down. If you have also been led to believe this, you need a reality check. True, gold provides a good hiding place when there is turmoil all over. However, only recently, we saw gold prices tank by more than 20% in a matter of weeks. Invest in gold because it has little correlation with other asset classes, such as equities and debt, which helps diversify the portfolio. Jayant Manglik, president, retail distribution, Religare Broking, agrees. “Gold adds an element of diversification to the portfolio,” he says.
Where to begin
“Make a clear distinction about buying gold for consumption purposes or as an investment,” insists Maalde. If you are considering your first investment in gold, go for paper gold. Buying physical gold entails high making charges, with concerns about its purity. On the other hand, gold ETFs offer investors the triple benefits of security, convenience and liquidity. Investors are also assured transparency in pricing and can liquidate their holdings quickly at the prevailing market prices. You would need a trading account and a demat account to invest in gold ETFs. If you do not want the hassles of opening a demat account, you can consider gold funds, which are essentially funds of funds that invest in gold ETFs. This avenue offers the convenience of investing through the SIP route. However, keep in mind that you will pay the fund management fee to the gold fund and bear the expense ratio charged by the gold ETFs in its portfolio.
Having your own house provides a sense of security and an elevated social status. However, home buyers have to tackle a long list of issues. “Real estate as an investment can be very tricky if you do not know what you are doing,” says Suresh Sadagopan, founder, Ladder 7 Financial Services.
Why to invest
The low volatility in real estate prices lends stability to the investment. The prices rise gradually over time, compared with other asset classes, which may see wide fluctuations. It also provides a steady stream of income through rentals, even during a lull in the economy. Even if you do not intend to live in the house, you can partly finance your mortgage payments and other expenses through the rental income. Besides, it provides several tax benefits by allowing you to claim tax deduction on repayment of principal and interest on the housing loan, as well as repairs and maintenance. Most importantly, it provides the much-needed diversification to your portfolio. But keep in mind that there are different considerations when you buy real estate for investment and for self use.
Where to begin
Investing in real estate isn’t a cakewalk. Finding a good property with decent amenities in a good neighbourhood, which is close to your place of work, school and markets is a huge challenge. However, a little homework can help you zero in on a good deal.
You first need to work out a budget to finance the down payment for the house and subsequent EMI payments. Remember that you will have to meet the EMI obligation month after month. Also, factor in the expenses you are likely to incur after the purchase. These expenses are anything but ancillary. Painting, furnishing and maintenance can add up to a huge sum. Shopping for a home loan is another aspect requiring homework for first-time home buyers. Lenders will have marginal differences in interest rate, processing fees, margin money, prepayment options, etc. Go through the fine print carefully before signing on the dotted line. “First-time buyers should opt for a ready-for-possession property. There are too many hassles involved in one under construction,” says Sadagopan.
Top rules for stocks
- Invest only what you can afford to lose.
- Avoid investing large amounts at one go. Buy small quantities at regular intervals and try to get a feel of the market.
- Avoid trying to time your entry.
- Even professional investors find it difficult to catch a stock at its lowest price. Buy a stock in which you have strong conviction.
- Ignore tips and hot trends.
- Often, first investments are driven by friendly tips or prevailing hot trends. Traders love beginners as they chase the hot trends and drive prices higher. However, the traders bail out, leaving beginners in the lurch.
- Have realistic expectations of returns.
- Stocks can create enormous wealth, but don’t expect to hit the jackpot early on. You might not earn good returns initially and may, in fact, suffer losses.
- Don’t succumb to emotions.
- Stocks are inherently volatile. Even a good stock can fall if the market turns bearish. Don’t let fear and greed drive your investment decisions.
Top rules for debt
- Consider the reinvestment risk.
- Be clear how you will deploy the money when the instrument matures and you get the money back along with the interest or capital gain.
- Check the tax efficiency of investment.
- The interest from FDs and NCDs is taxed at the rate applicable to your income slab. The income from debt funds is treated as capital gain if the investment is for over a year.
- Match investments with cash-flow needs.
- Match investments with cash-flow requirements. If you need money in three years, invest in an FD or FMP. If you can wait, go for instruments with longer terms.
Top rules for gold
- Invest purely for diversification.
- Invest in gold for diversification and stability of your portfolio. Don’t be misled into believing that gold prices will only rise over time.
- Limit your exposure to 10-15 %.
- Do not try to get rich with gold. Contrary to belief, investing in gold carries a high degree of risk. Up to 15% of the portfolio is enough to gain a meaningful exposure to the asset.
Top rules for real estate
- Move fast.
- Think before finalising the deal, but once you zero in on an option, move quickly. Good properties get snapped up fast and waiting may result in diasappointment.
- Work out your budget.
- Secure your finances before the deal. Avoid taking on an EMI obligation that takes up more than 40% of your monthly income.
- Take professional help.
- Don’t get carried away by tall claims and leave nothing to chance. Whether it is inspecting the property or arranging proper documentation, take the help of professionals.
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