The year 2017 was unusual for investors, as Sensex skyrocketed from around 26,500 to 34,000 in a year, but all other asset classes like gold, real-estate and fixed deposit gave poor returns. Due to this, a lot of people are showing interest in investing in equities because this was the only asset class, which gave high return in 2017.
However, financial experts have warned that such an approach towards investment can be dangerous for investors. In fact, they are totally against the very idea of investing in any asset class just because it has given high return in the previous year. Rather, they recommend that investment should be goal-based.
Before making an investment, people should ask themselves what is the purpose behind making an investment. The objective could be education of a child, retirement planning or purchase of a house at a later date and etc.
Anup Prabhu Verlekar, a chartered financial planner (CFP) from Mapusa, said, "I would definitely not recommend investing in stocks in the shorter run. When you invest in a stock, you are actually investing in a company. It's very difficult to say how a company will grow in 3-5 years. Moreover, stock market has wild ups and downs and it's very possible that when you want to sell your investment, the market is down and therefore you may make losses."
Prabhu Verlekar advises investment in debt mutual funds for short to medium term. The value of investment in debt mutual funds does not fluctuate a lot and therefore you are rest assured that you will make a gain at the time of selling your units. A debt mutual fund invests in fixed rate securities like government bonds and corporate bonds.
He continued, "The return on investment in debt mutual fund attracts lesser tax than fixed deposit. The interest on bank FDs is taxable at the tax-rate of your income slab. However, in case of debt mutual funds, you can take benefit of indexation, if you are selling your investment after more than 3 years."
In other words, the tax-man will deduct inflation rate from your return on debt mutual fund and will impose tax only on the remaining, provided if such an investment is sold after more than three years. Other financial planners concurred with Prabhu Verlekar.
Vishal Dhawan, a CFP, said, "There is a tendency to over-invest in equities, especially when the Sensex is already on a high, which can be very risky. The investors should focus on what their investment goals are. If your portfolio already has too much equity investments, then, it is advisable to look at fixed income options."
But, the problem is most investors limit themselves to just bank FDs, when it comes to fixed income options. This may not be the best approach because the interest on FDs is almost always lesser than inflation rate over medium to long run. Therefore, the real value of investment in FDs actually comes down over time. Then, how should people invest in fixed income options?
Dhawan replied, "You can invest in several fixed income options like debt mutual fund, public provident fund (PPF), 8% Government of India bonds and bank FDs."
The reason financial planners advise goal based investment is because it ensures that you will have money when you want. Let's take the example of a person, who is saving for his education and would require Rs 10 lakh for a degree in 3 years. In such a case, it is much safer to invest in a mix of fixed rate options, which Dhawan suggested. Investment in fixed rate options would assure that the person will have definitely made some return in three years. Equities, on the other hand, depend upon stock market, which can fall considerably thereby threatening the amount invested.
Gaurav Mashruwala, another CFP, said, "If your financial obligation is within 2 years, then you should invest in fixed income instruments like FDs, recurring deposits, debt mutual funds and post office schemes. You should keep in mind liquidity and tax obligations while making these investments. Otherwise, I always say that it does not matter at what value Sensex is. What you need to ask yourself is what is your financial responsibility and invest accordingly."
Most financial planners advise that people should invest in equities only for long term, which means at least 5 years.
Prabhu Verlekar said, "One can do a systematic investment plan (SIP) in an equity mutual fund. It imposes a discipline on the investor of having to invest an amount each month. Alternatively, people can invest a lump sum amount as well by picking up few blue-chip stocks on their own after understanding the performance of those firms. To find blue-chip stocks, investors can study the portfolio of famous mutual funds."
Dhawan said, "When it comes to investing in equities, people can even consider dynamic mutual funds. These funds invest in a mix of equities and debt instruments."
It's impossible to say at what value Sensex will close by the end of 2018. Similarly, it's very difficult to predict what rate of interest banks FDs will offer in the future. But, almost every investor can foresee what his or her financial obligations will be in 1 year, 3 years, 5 years or even 20 years. The financial experts unanimously say that investments should be a function of requirements and investors shouldn't be driven by greed.
