|
YOUR FIRST INVESTMENT
First-time
investors often find it difficult to choose the right option.
How
to 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. It’s the
same for anyone exploring a new asset class.
Often enough, initial investments are done without
proper planning, homework or understanding one’s requirements. Prasenjit
Paul from Kolkata recalls his maiden steps in the stock market. “I started
intra-day trading without adequate knowledge and suffered a huge loss by
taking deliveries; the value of my portfolio reduced by 30-40%. I couldn’t
use the stop-loss arrangement and the losses kept increasing,” says the
22-yearold. Paul learnt from his mistakes quickly and today runs a stock
advisory firm.
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.’ In the
following pages, we offer you a helping hand as you take your first step.
EQUITY
Many of us choose to stay away from the stock
market because of the risky nature of such investments. For some, it is
akin to gambling in a casino. However, we also hear of stories where people
have 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
If you have made up your mind to invest in stocks, make sure you are
doing 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. It is probably the only
asset class that has the potential to beat inflation over the years. It is
crucial that investors come equipped with the right attitude and understand
the risks involved. Hemant Rustagi, CEO, Wiseinvest Advisors, urges
first-time stock 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
Experts believe that first-time equity investors need to test the
waters before jumping into the deep end of the pool. Mutual funds are the
ideal starting point to do so as these take away 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 rather than doing so on one’s own.”
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 safe debt instruments, with
a dash of equity thrown in. If you do not know how much risk or volatility
you can handle, an equity-oriented balanced fund will take you on a
learning curve. 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.”
While equity investments can yield spectacular
returns, they can also lose money very fast. For a first-time investor, a
dramatic fall in the stock market may be tough to handle. The debt portion
of his investment will cushion the impact. Those who can take on some risk
can even opt for a pure diversified equity fund or an ETF. After you get
the hang of how the equity market is influencing the fund’s returns and are
comfortable with it, you can try your hand at investing in stocks on your
own.
However, if you are keen to dabble in stocks right
at the outset, be ready for some heartburn. The stock that you zero in on
is not important. The first few picks will give you an understanding of the
market, as you track the share price movement and the news flow around the
companies. Even if you make mistakes, you will learn from the experience.
So, don’t lose heart if you burn your fingers initially.
However, make sure you put in only small sums that
you are happy to experiment with. If your initial 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 for your stock picking
genius. If you are going to invest in stocks on your own, make sure you
follow some basic investing rules.
DEBT
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 Public
Provident Fund 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 aside a part of their money in debt, which would help protect
their portfolios from a sudden, drastic fall in the riskier asset classes.
WHERE TO BEGIN
By investing in a safe fixed-income option, you build a foundation for
your portfolio. However, you should be clear about what you want. Are you
seeking income, safety or growth? If you are looking for a constant 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 longterm 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. Bond
funds have been known to provide double-digit returns in good times. Be
sceptical of high-yielding NCDs and corporate bonds, though. They offer
higher returns than most debt products, but carry a higher default risk.
GOLD
The shiny yellow metal holds a special place in the
hearts of Indian investors. Much of this sentimental attachment is towards
physical gold, mostly in the form of jewellery. As such, gold was not seen
as an investment avenue until recently. 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 lack of faith in the global
monetary system or when political turmoil is widespread. However, this
doesn’t make it immune to a sell-off. Only recently, we saw gold prices
tank by more than 20% in a matter of weeks. The reason to invest in gold,
therefore, should be 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, it makes sense to invest in paper gold, which is a more
convenient way of buying it. You do not have to hold it in the physical
form, so you needn’t worry about its storage and safety. 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 also don’t have to worry about the
purity of gold as these funds are required to hold an equivalent quantity
of standard gold bullion of 99.5% purity. Unlike physical gold, investors
are assured transparency in pricing as there are no making charges or
premium involved, and units are traded on the exchange. Investors 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. Maalde
insists that gold savings funds are a good proposition. “One need not open
a demat account and bear the cost of brokerage to invest in a gold savings
fund. The facility of investing systematically is an added benefit,” he
says. 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.
REAL ESTATE
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 before committing to the investment. If you are not careful,
even a small mistake can put you in misery for years or leave your finances
in a mess. “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
As an investment, real estate is like no other. It is simple to
understand, tangible, and can greatly enhance the returns of your
portfolio. 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. While preparing the
budget, do not forget to factor in the expenses you are likely to incur
after the purchase. These expenses are anything but ancillary. Painting,
furnishing and maintenance expenses can amount to a huge sum. Shopping for
a home loan is another aspect requiring homework for first-time home buyers
or investors. Lenders will have marginal differences in interest rate,
processing fees, margin money required, 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 because there are too
many hassles involved in one that is under construction,” advises
Sadagopan.
|
No comments:
Post a Comment