Investments are highly dependent on the earnings potential, the risk-taking capacities, the primary objective behind wealth creation, the expected rate of return, familiarity with the type of investment instrument, stability of income and upcoming expenses that are required to should be dealt with immediate urgency.
People often look for the right investment opportunities with the purpose of wealth maximisation in the shortest period of time. With the varying characteristics of people and different expectations, a particular investment scheme could be so apt for one, while it could be the worst investment for another.
Given the ever-evolving volatility in the markets, a large section of retail investors is looking forward to earning a nominal return that has the minimum exposure to risk and uncertain external factors.
Saving money is a habit, a choice, a discipline, a practice that can cushion you in the adversities. On the other hand, investment is more of a process, a commitment towards staying invested in selective assets as per your appetite, an art of valuing assets at a certain price, gauging the value throughout the investment period to conclude a profitable decision to garner the maximum possible returns.
Savings should not be used interchangeably with investments. As far as the Indian households are concerned, almost every other person from a daily-wage worker to a chief executive or managing director of a multinational conglomerate saves for the future. The differentiation arises when we look at the percentage of adults who are actively or passively investing in any of the assets.
The classification of investment is done between two extremities, namely an asset with ‘high return and high risk’ and an asset with ‘low return and low risk’. Most retail investors, salaried taxpayers and adults in their 30s are willing to take a certain amount of risk, as a result of which such category of individuals hunt for investments that have a moderate risk profile and a relatively better return as compared to the risk-free asset.
Let’s compare and understand
|Investment Options||FDs||Bonds||Debt Funds||Equity Funds||Direct Stock|
|Return after 1st year||106,000.00||109,000.00||112,000.00||115,000.00||118,000.00|
|Return after 2nd year||112,360.00||118,810.00||125,440.00||132,250.00||139,240.00|
|Return after 5th year||133,822.56||153,862.40||176,234.17||201,135.72||228,775.78|
|Return after 10th year||179,084.77||236,736.37||310,584.82||404,555.77||523,383.56|
|Return on investment (ROI) after 2nd year||12.36%||18.81%||25.44%||32.25%||39.24%|
|ROI after 5th year||33.82%||53.86%||76.23%||101.14%||128.78%|
|ROI after 10th year||79.08%||136.74%||210.58%||304.56%||423.38%|
1. Fixed deposits (FDs)
FDs are the most conventional forms of investment one could think of, when surplus money is lying in the bank account. The ease of investing, accessibility of bank, straightforward terms between the depositor and the bank, uncomplicated redemption, fast settlements and better returns as compared to a savings account are some of the notable features of a term deposit with a bank, post office or a non-banking financial company (NBFC).
Though the lowest rate of return on fixed deposits makes them less lucrative for investment than the other investment options discussed. However, it is entirely up to one’s financial condition whether the person should opt for FD as an investment option.
2. Corporate Bonds
Moving on from the cumulative benefits of FDs, corporate bonds can rightfully fulfil the requirements of retail investors as they offer a fixed return over a period of time until maturity. A superior rate of return than FDs in most cases makes them a preferable investment, while with the added portion of returns, you’re certainly attracting an added piece of risk to your portfolio.
A thorough check of the company’s history on bond issuance, payment of coupons, the rating assigned by the credit rating agency, the risks associated with the corporation itself and the scope of opportunities can certainly help in the decision-making process, whether to invest in a bond issue or not.
3. Debt mutual funds
With the market-wide acceptance of mutual funds and increasingly growing participation of retail investors, debt mutual funds can be a relatively safer option as a number of these funds outperform many bonds, as far as the return on investment is concerned.
Investing in a fund containing a number of market-tradeable securities automatically diversifies your portfolio, while it also increases your exposure to various fixed-income securities and a couple of equity assets, if not more. Climbing up the ladder of returns, a person is required to undertake and absorb more shocks as the risk moves increases substantially.
4. Equity mutual funds
Equity funds, by and large, have been one of the most preferred routes of equity investments by retail investors. With the availability of equity mutual funds, people are progressively participating in the equity story of India without actually buying a stock or undergoing the exercise of analysing the companies in detail.
Equity funds certainly provide concentrated access to stocks as per the classification of assets, you can choose between large-cap, mid-cap and small-cap. Individuals looking forward to enjoying the stock market joyride can consider equity funds, however, you’ll be exposed to high risk as compared to the aforementioned investment options.
5. Direct stock investment
Equity, being the most rewarded asset class, has a separate fanbase. All the notable investors across the world have a large appetite for investing in stocks, exchange-traded funds, and shares of companies even before listing on bourses. The primary reason for such an inclination is the high returns and possibilities of multi-fold growth over the years.
Almost every person who is invested in markets, or is exploring the right opportunity to enter a trade must have heard stories of exponential growth by investing in stocks. But, the stern reality is, that only a fraction of traders and investors succeed in their equity journey, managing to mobilise exceptional returns.
The returns in stock market investing can be maximised with independent research, deep-down insights, and timing. No two people can earn a similar return by entering the trade at different times, holding onto the assets for a different duration and selling them on different days. The returns can be maximised if you’re able to get the stock at a cost-effective market price and sell it near its lifetime high levels.
It is quite clear from the table that Rs 1 lakh invested across the assets discussed, direct stock market investment is a winner. Equity mutual funds, as well as direct market investment, can double your investment within a period of 5 years, while you won’t be able to generate a 100% return even in the period of 10 years.
However, the risk and uncertainty broaden as we move forward from term deposits to equities. There can be instances when an investment directly into equity or equity-oriented funds could turn negative for a year or a couple of years during the investment duration of 10 long years. Similarly, there can be chances that the same asset could provide an exceptional return of 50% in a calendar year.
Given the market conditions, there could be bonds that can provide a periodic interest of more than 10%, whereas some AAA-rated corporations may default on interest payments.
Note: Interest rates for bonds, mutual funds and the direct stock market is indicative only. There’s no surety that such returns can continue over the course of the period.
Disclaimer: This is not a piece of investment advice. Please conduct proper due diligence before shortlisting assets for investment purposes. You can choose to consult a registered financial advisor.