Deciding On Investment Options – Not too tough!

Investing can confuse even the most experienced financial whiz kids. With the heap of investment options that there are existing in the financial markets these days, it really is a tough call to decide on the one that meets your expectations and cash inflow preferences. Keeping all demographics in mind, if I have to specifically talk of an average Indian investor, there are a lot of factors that go into consideration. Some vital points; if borne in mind, can help you decide upon the most conducive option without being shown multi-colored dreams by your financial planner.

So, Let’s see what all we should care about, besides the visible profits, returns, gain, etc.

• Firstly, assuming that you chance upon an Investment option that is risk neutral. Say for example, a Fixed Deposit (Let’s call it an FD going forward for ease of conversation). If an FD pays you a return of 8% and the inflation is at 12%, then the FD is not giving you any return practically. Hence, you now need to consider the nominal and real returns. The FD will prove to be beneficial only when its return exceeds the inflation rate in the country.
• Now even if your FD is paying you a return greater than your inflation rate then you have to consider tax rates on earnings. Your earnings on financial instruments come under the heads- Short term Capital gain,Long term Capital gain or Income from Other Sources. Generally, for a One-year long fixed income instrument that gives you 8% return against an inflation of say, 4%, your actual returns will depend on the Income Tax slab you fall in. If you get taxed at the rate of 33%, then your actual take-home return is somewhere between 2 to 3%.
• Every financial instrument has some hidden costs embedded in it. Whenever you wish to take up any instrument, you should ask your Fund Manager about the hidden costs that manifest n the form of Entry Load, Exit charges and Surrender Charges etc.
• This is especially important when you talk of Unit Linked Investment Plans. One major incentive for you to go in for them is the rebate, which you stand to gain on your payable Income tax. Generally, if your portfolio manager assures you a return of 20% on any stock and the return of the Benchmark Index on which it trades is 25%, then the return is certainly not fancy enough. So we should be well aware of the Index return also in order to be able to take a prompt call as a customer.
• Lastly, you should be applying Time Value of Money to your Investments. If you feel that today’s investment of Rs 10,000 will give you Rs. 50,000 after 3 years and hence, it’s a lucrative option- then you should consider both the amounts on one common time horizon. Either discount that future gain of 50,000 to its current value or compound to see what the current amount of Rs.10, 000 would be worth 3 years hence.