Today, we have a number of options to choose from in assets to invest our money. Further, it is important to manage the entry and exit (switch) of your investments. Therefore, financial services/securities companies play an important role in helping you choose the right approach for your investments, which need to be customized according to your profile.
Investment Options (Asset classes)
Companies launch their Stock IPOs to collect money from investors and subsequently, list their shares on the secondary markets/exchanges such as NSE or BSE, which we call stocks/shares. These stocks/shares fall in the equity asset category. Companies do not have to offer any guaranty on returns or principal amount collected from the investors.
Government or companies launch their bonds/money market instruments to collect money from investors. Companies might subsequently list these bonds in the secondary markets/ exchanges such as the NSE. These bonds/money market instruments fall in the debt asset category. Companies have to offer guaranty on returns (Interest) and principal amount collected from the investors.
Some of these bonds or debt instruments also get traded in the secondary markets/exchanges and investors may buy them at a premium or discount from the markets and may sell them before maturity. Such investments may not guarantee principal amount or returns (interest). This is called churning of investments for short-term gains from movement in bond prices.
Therefore, if debt instruments remain invested from start until maturity, they offer principal guarantee and interest with low risk, while trading in the same instruments may not offer same lower risk with potential capital loss.
Real Estate in India was not previously considered as an investment asset class by most people. Many of us would buy a home to stay and a second home as a weekend getaway. This perception has now changed, with consistent and above average rise in real estate prices. Real estate has emerged as one of the core asset classes in your portfolio.
Globally as well, real estate asset class has proved its mettle in the long run by generating handsome returns not just in equity bull markets but also when other asset classes are not performing. Now, the Indian government is also expected to allow real estate funds, which can attract even retail investors to participate with lower minimum investments criteria.
Another major basic asset class is Commodity, which should also be a core part of your portfolio with essential needs as its basic characteristic. Commodities such as metals, pulses, oil, and gold have become the basic need of human beings. There is a gap in the demand and supply for such commodities. This mismatch in demand and supply makes prices of such commodities volatile.
Some of these commodities such as gold and silver are classified as precious metals and act as a hedge against equity market downturn. Overall oil reserves of the earth are reducing and are expected to be drained in the long run. Oil also plays a very important role in the economy and may impact your portfolio positively or negatively at periodic intervals. You may choose to hedge your portfolio with such commodities with a direct short term investment or may invest through commodity based companies to gain from their futures.
Cash and Money market Cash Equivalents
Idle cash in the bank also generates returns for you but may not be sufficient to take care of rising expenses with increasing inflation. Yet, liquid cash is required for emergencies and also when you choose to shift from a certain asset class owing to over-valuation or expected future downturn. Therefore, you need to allocate some portion of your portfolio to cash and equivalents.
Other factors to consider while investing
The INR i.e. the Indian Rupee and the US $ were at the same valuation when India got its independence in 1947. Since then, the Rupee has depreciated to levels of Rs. 60 per US $, as it stands today. That is, the Rupee is 60 times lower than the US currency. Until 1985, the Indian currency was at Rs. 12 per US $ but post 1991 crisis and after making the INR free from manual intervention for a year, it depreciated to Rs.31 per US $.
Currency movements can impact your investments directly or indirectly. Export–import companies based in India such as IT and Oil get affected by currency movements positively or negatively. Therefore, sometimes currency hedging is also an important factor to consider to protect your portfolio.
Ways to Invest
You can directly invest in above three major asset classes. Apart from that Mutual Funds and Insurance also invest in above asset classes such as Equity, Debt, Commodities, and Money Market Cash Equivalent Instrument. There are no real estate funds as of now in India. However, you can choose to invest in the above mentioned asset classes i.e. Equity, Debt, and Commodities through Mutual Funds. Mutual Funds have separate schemes for each of these asset classes with further classification in terms of investment characteristic and objective.
Insurance also has certain Equity and Debt asset class investment based schemes. We still advice to use Insurance mainly to secure your Life Risk and Health Risk Cover rather than using it for investment capital growth.
Product Research & Financial Planning Desk
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.