Investment is the backbone of financial planning. So if financial planning is battle training, investment is the Kargil. This is an ultimate practical experience and while doing this question or query is bound to surface. Hence this is the page where I have collected the common investment questions that arise in every once mind. You are likely to get solution to your query here or else ask me through the comments section.
- Should I take loan & invest in Stocks?
- Are Company Fixed Deposits Safe?
- What are ETF & which Indian ETF I should Invest in?
- How much I save for my goals?
- How to get good returns through futures & options?
- What about investments made in IPO.
- What will happen if we are caught in spiral like Japan?
- What should I expect from my Bank Fixed Deposits?
Question: My Friend who’s a stock broker, advising me to purchase some stocks as stock markets is at very attractive levels? As I don’t have enough money so he’s told me to get a personal Loan. I can pay EMIs easily, but is it advisable?
This is not a friendly advice. Either your friend wants to earn brokerage out of your risk or he’s also not that equipped with knowledge to advise you on financial matters. Stock market is one of the most risky asset classes at least for short term where you can earn or lose the fortune. But even if you want to stay invested for long term and you are comfortable in paying the EMIs then also I would not advise you to enter this investment by taking Loan. No one can guarantee you returns in stock market. Personal Loan is among the costliest Loan available as bank doesn’t ask for any security or collateral along with it. It’s Interest rate varies from 16%-20%p.a. As there’s no guarantee in Stock market so it’s very risky to take loan and invest. Moreover there’s a condition attached with personal Loan that this money should not be used for Stock market Transactions. I advise you to start a SIP in Equity Diversified Mutual Funds with the amount you are comfortable paying as Loan EMIs. This will help you in building up the corpus and also satisfies your desire to enter into stock market.
Company Fixed Deposits
Question: I want to invest in company fixed deposits which are safe and good to invest with fairly good return. May I request your good self to suggest the name of safe company for investment? Period of investment is 3 year.
There’s no company which I can call as safe. Fixed deposits are unsecured loans that companies procure from general Public. If a company defaults and goes bankrupt, fixed deposit investors will be paid second last i.e before Equity Investors. But still you can check those companies which have good rating by credit rating agencies. Rating does not make company deposits safe but at least it helps in gaining confidence on the soundness of repayment capacity. There are some Government companies also which issues FDs. You can consider those also.
ETF or Exchange Traded Fund
Question: Can you please provide me an update on ETF…. What is ETF? How much return do we get? For someone at my age of 25 it is right time for me to invest in ETF? Which ETF should I invest for long term?
ETF or Exchange traded funds are passive funds which follows some particular index be it Sensex or CNX 500. These funds are similar to index funds with only difference that these are listed on exchange – so you can also do transaction any time in the day rather than waiting for end of the day. Returns in ETF are directly linked with index performance so if Sensex will give 12% return in year – you can also get the same amount. My suggestion as India is still a growing economy – there is a scope for fund managers to beat index. So you should make your portfolio through 3-4 diversified equity funds.
How much one should save?
Question: How much percentage of my total Income should one invest and in which financial instrument considering children education and retirement planning?
Actually percentage of income going in goals depends on once age & type of asset class you are choosing. If someone is around 30 years & invest in equities – approx 15% income will be sufficient to achieve these basic goals but he is investing through debt may be 25% of income is needed. But if someone is close to 40 the he needs 25% through equity & 35%-40% in case if debt. But as I said other factors like Job security, other goals also determine the quantum of investment.
Future & Options
Question: Please tell me about how to invest in Futures & Options. How I can earn good returns from it.
Future and options are most common “Derivatives”. Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company, a currency, or a commodity like gold etc. The derivative instrument can be traded independently of the underlying asset. As per most famous investor “Derivatives are instruments of financial mass destruction”. Why he said this – because derivatives are leveraged instrument & very risky for any investor. Institutional players use these Instruments for hedging their positions but retail investors use them for speculation. Assume that you have capital of Rs 50000 – that you used to buy a future of x company by paying 25% margin. Now if particular stock(underlying security) will rise by 10% in a month you will gain Rs 20000 on your portfolio or 40%. Now think if it goes down by 10% – as retail investor don’t have understanding or control over their investment; they soon lose their capital.
IPO or Initial Public Offer
Question: I have 300 shares of Jsw energy, which is received at the time of IPO offer. I want to know about the future of this share from the point of view of as an investor, I am not a trader. Please give the expert opinion.
Investor often thinks IPO is a good way to make QUICK money and gets attracted towards it. It is true that few of the companies who came up with an IPO have done well but it is not easy to pick the right ones. Do you remember Reliance Power IPO in Jan 2008 & same happened with other power & infrastructure IPOs. Investor thinks that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium. Do you know BSE IPO index which was launched in August 2009 is down by 9% & in the same period Sensex has given more than 25% return? One should stay away from IPOs or be very choosy.
India Vs Japan
Question: What will happen if we are caught in spiral like Japan i.e. correction of 80% & still bleeding though Japan’s companies are not bleeding then why the Nikkei is not giving the returns? I hope u must be getting what i wanted to ask. Please do clarify why we will go on making new highs on index although with ups n downs
There are 2 reasons for what happened in Japan- first when their market topped it’s valuation was almost 5 times of average. Their PE was approximately 100 at that time. Second Japan is now a developed country & in last 2 decades their GDP growth is 2-3% max. Hope it answers your concern. India is still growing economy and the best is still to come. Next 10-15 year will be Golden years for India – you will like to sit out & watch the game or would you like to participate.
Bank Fixed Deposits
Question: What are the historical real returns on Bank Fixed Deposits in India? When will they turn positive?
Real rate of return is when we remove adjust normal/nominal rate of return (like 7.5% on FD or 8% on some post office scheme) is adjusted for inflation. Normally bank interest rates gives close to 1% of real rate of return but if consider taxation actually we are making losses. Last 2-3 years were pathetic for a debt investor as real rates are negative – even RBI is concerned regarding this. India is a growing economy & inflation will always be higher due to demand coming from public – one must hold equities & real estate to take benefit out of it.
In Case you have questions related to investments ask in comment section.