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How To Choose The Right Investment?

    Mr. C.S. Sudheer | Wednesday, October 12,2016, 07:29 PM
 

“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.”

                                                                                                                                                                                                  - Peter Lynch

Yes…..Just earning money, even a lot of it, is never going to make you rich. You need to invest this money wisely. The first step….Choose the right investment, to put in your hard earned money. This is where a single word comes to mind, “Choice”. You are not choosing the best investment. You are choosing the right investment….An investment which matches your needs. Investing is not about picking up a bunch of great investments. It’s picking up a set of investments, which work together and help you achieve your investment objectives.

Want to learn how to choose the right investment? IndianMoney.com offers Free, Unbiased and on-call financial advice on Insurance, Mutual Funds, Real Estate, Loans, Bank Accounts and capital markets. Just leave a missed call on IndianMoney.com financial education helpline 02261816111, or just post a request on IndianMoney.com website. 

Invest with investment objectives in mind

The investment you choose, depends on your investment objectives. Find this difficult to understand? Simple….It’s why you’re making the investment, or what you want from your investments.

  • Are you investing money to buy a house?
  • Are you setting aside money for retirement?
  • Are you investing money for your children’s education and marriage?
  • Are you investing money to buy a car?
  • Are you investing your hard earned money, to generate an additional source of income?

Choose an investment based on your risk profile

Risk profile….sounds a very difficult word to understand. It’s nothing but your appetite, ability and willingness to bear risk, in your investment. An investment in equity is considered very risky. It is…if you are a short term investor. An investment in equity (equity mutual funds and stocks), generally gives good returns, only if you stay invested for around 3 to 5 years. The concept is simple,“ Higher return, but at higher risk.”  If you are a young, tech savvy and like to take risks in your investment, then equity is just right for you.

What if you are a conservative investor?  You understand only four words, “Safety of your investment.” You are willing to accept lesser returns, but the risk of losing money, has to be low. You would invest money in fixed deposits, PPF and other safe instruments.

Understand how the investment works

Never invest your hard earned money, unless you understand how the investment works. If you are not able to understand the investment, it could mean:

  • The person explaining the investment, cannot understand it.
  • There is something hidden, which he does not want to tell you.

Check for hidden charges in your investment

Your investments can be a trap. Hidden fees can eat up all the returns, you get from the investment. Let’s take an investment in mutual funds. You have the exit load. This is a fee charged by the mutual fund, when you exit the mutual fund (withdraw from your investment).

The mutual fund where you invest your hard earned money, has an expense ratio. This is nothing but the cost of running and managing the mutual fund. A mutual fund has:

  • Fund management expenses
  • Marketing expenses
  • Custodian expenses
  • Investor communication expenses.

Lot more other expenses…..and you are paying for these expenses. Sure, SEBI has imposed limits, on how much you would be charged by a mutual fund. But mutual funds have been increasing the expense ratio, in recent times. You could also invest in a property, as an investment.  You need to be aware of the hidden charges, while buying a property. You have stamp duty and registration fees, which may be around 7-10%, of the cost of your property.

Remember: If you are investing in something that costs more, make sure you have a good reason to do so.

Check the tax benefits of your investment

Last but not the least, check the tax benefits of your investment.

Tax benefits for an investor who likes risk:

  • You have invested your money, in equity mutual funds and stocks. If you stay invested in equity mutual funds and stocks for a year or more, the returns/profit you get called long term capital gains, are tax free. If you like to take risks in your investment, this is an added incentive to do so.
  • You have Equity linked saving schemes, popularly called ELSS, which enjoys EEE benefits. ELSS has a very high exposure to equity. You get a tax deduction up to INR 1.5 lakhs a year, under Section 80 C of the income tax act, on the amount you invest in the ELSS. The amount which accumulates and is withdrawn at maturity, is tax free. An excellent investment for the youth, who wish to enjoy tax benefits in our country.

Tax benefits for a  conservative investor:

  • You have an investment in NSC, Post office time deposits, Senior citizen savings scheme (SCSS), tax saver fixed deposits, which enjoy a tax deduction up to INR 1.5 lakhs a year, under Section 80 C of the income tax act, on the amount invested.
  • An investment in PPF (Public Provident Fund), enjoys “EEE” benefits. You get a tax deduction under Section 80 C, up to INR 1.5 lakhs a year, on the amount you invest in the PPF. The amount which accumulates and is withdrawn at maturity, is tax free.

Being a good investor is all about staying positive. As the great Benjamin Graham says,

To be an investor you must be a believer in a better tomorrow.”

If you don’t have faith in your bank, why invest in a fixed deposit with them? You don’t believe Companies will make a profit? Why invest in stocks and equity mutual funds? Be Wise, Get Rich.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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