MUMBAI: 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.
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.
Most people prefer to play it safe while making their first investment. 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.
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.
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.
Your first insurance policy
The insurance market can be very confusing, especially for the first-time buyer. Here's how to cut through the clutter and purchase the right cover.
It's important to buy insurance because it protects you against financial loss due to unforeseen events. What's more important is that you buy the right cover. An unsuitable policy will not only be a drain on your finances but also give you inadequate protection. You must fully understand the features and limitations of the policy you are buying. Here are a few tips to help you choose the right cover.
DO YOU NEED INSURANCE?
Before you buy life insurance, ask yourself if you really need it. A life cover is meant to replace your income and provide financial assistance to your dependants if something untoward happens to you. If nobody is dependent on your income, you don't need to buy it. Some insurance policies are sold as retirement tools or tax-saving options. However, these objectives are better achieved by other saving options, such as bank deposits and the Public Provident Fund.
You will need life insurance when you get married and start a family. At that stage, a pure protection term plan should be your first life insurance policy. "You should buy a term insurance plan even before you open a bank account," says T R Ramachandran, managing director and CEO of Aviva Life Insurance. Term plans are especially useful if your income is not very high because it provides a high cover at low cost. The costs are even lower if you buy online. A 28-yearold man can buy a Rs 1 crore cover for around Rs 8,000 a year.
According to experts, one should have a cover of at least 5-6 times one's annual income. This does not include any outstanding loans taken by the policyholder. Also, buy for the maximum term available. "Your insurance should not end when you are in your 50s because buying a new plan at that age may not be feasible," warns insurance professional Deepak Bhuwania.
CUSHION AGAINST MEDICAL EXPENSES
The high cost of private health care means you cannot afford to ignore medical insurance. Even if your employer provides a health cover, you may have to buy on your own. You might be left without a cover if you change jobs. A basic indemnity-based medical insurance plan is advisable. If you are married and have children, buy a floater plan because it offers a larger cover for the entire family at a lower price compared to individual plans for each member.
Besides a term insurance and medical cover, you should also consider buying a personal accidental policy to cover death or disability due to an accident. For as little as Rs 225 a year, you can get a basic cover of Rs 5 lakh, though add-on covers may cost more. A personal accident policy is unique because it offers three benefits. If the policyholder dies in the accident, it provides a lump-sum payment to the nominee. If he survives, it pays for hospitalisation expenses. If he is disabled and loses livelihood, it provides financial support. Life insurance plans cover only death, while medical plans pay only for hospitalisation.
However, you will have to do a lot of running around to buy this plan. Agents rarely sell these low-cost personal accident covers because they earn barely Rs 20-30 as commission. You can buy an accident cover as a rider along with a life insurance policy.
COVERING YOUR HOUSE & CAR
A house is perhaps the costliest asset, but very few homeowners insure it. The cost of insuring the structure against damage is as low as Rs 50 per Rs 1 lakh. Keep in mind that you don't need to insure the house for the value of the property, but only for the cost of reconstructing it. The cost can vary from Rs 1,500 per sq ft for a basic structure to Rs 2,500 per sq ft for a premium construction. If you expand the cover to include burglary and breakage, the total cost of the insurance will not be more than Rs 2,500 a year.
It is best to go for a comprehensive plan that covers a wide range of risks. A standard fire and other perils policy covers damage due to fire, lightning, storm, flood, landslide, earthquake, vehicle impact, rioting, arson and bursting of pipes and tanks.
For your vehicle, don't be lured into buying the add-on covers that cost a bit but are not really necessary. A plain vanilla insurance cover will do just as well. Do remember to renew your third-party insurance cover in time. This protects you against compensation claims from third parties. Without it, you could be exposed to a risk running into several lakhs of rupees.