Today there are many investment options that one often gets confused to choose the ideal one due to a lack of knowledge on essential parameters to be evaluated before investing.
Time Horizon:
Time is the most crucial determinant for any investment decision. Your investments can be classified based on the time horizon (i) less than 3 months to very short-term (ii) 3 to 12 months to short-term (iii) 1 to 3 years to medium-term (iv) 3 to 10 years to long-term (v) Above 10 years to very long-term. As the time horizons increase, choose money market instruments to short-term debt to long-term debt and increase equity portions. Equity offers a much greater scope of wealth creation if invested for a longer duration.
Risk of investment:
Investment risks are different kinds and can arise from (I) nature of markets (ii) type of asset classes (iii) product manufacturer/ provider (iv) financial and regulatory climate, (v) political environment, etc. type of asset class, can be debt, equity, physical-gold, land, etc. the risks would be varied in nature. Debt risks are credit, liquidity, reinvestment risks. Equity risks are company, sector, and market-driven.
The real rate of Returns:
The real rate of return is the return obtained after considering taxes and inflation on nominal returns from any investment. To arrive at this, take the 'gross' returns from an investment – say 10% for 1 year on Bank FD and deduct tax from this. E.g., If one’s tax slab is 30%, then the post-tax returns will be 10% less 30% or 7%, then adjust for inflation or price rise by deducting inflation from post-tax returns. If inflation is, 8%, then the post-tax, real returns will be 7% less 8% ie, -1%. Thus, investment, in this example, is going to give you a negative real return.
Tax implications:
At four instances, tax incidence has to be evaluated. First, at the time of investing, if the investment is eligible for deduction like section 80C, 80D, etc. The second would be the taxability of the income generated from the investments. Income can be interest or dividend income. Third would be when the investment is redeemed or sold, the capital gains, long-term or short-term, need to be calculated, depending upon the period of investment held. The fourth tax is Wealth Tax, which is more relevant for high net worth individuals. A smart investment decision will be the one that gives the best tax benefits and minimum tax liability on the investment.
Costs:
Different types of costs are attached to different investment products. There are three types of costs (I) at the time of investing, new or additional money (ii) a percentage of investment value or fixed fees during investment is held (iii) at the time of withdrawing or exiting money. These costs can be mentioned as entry load, expenses, and exit load that may be calculated as a percentage of the agreed fees amount or a fixed sum. Further, costs may be levied for advisory services distribution and transaction services. There would also be costs while making service or operational requests that will be above the regular investment costs. Over time, the costs of many products have fallen drastically. While investing large amounts in products like PMS schemes, liquid funds, insurance products, they are the primary factor to be considered.
Liquidity:
Investments can be futile if unable to liquidate at the time of emergency or need. One will never like that the investments be blocked and unavailable when required. Liquidity means the ease with which investments can be taken back within the shortest period without incurring any costs or sacrifice of value while redeeming. An investment with greater liquidity is preferred to be useful at times of emergency and to make use of it with new investment opportunities.
Suitability:
There are plenty of products available in the market for specific purposes like child education, the safety of capital pension, retirement, wealth creation, etc. With a clear objective, one can choose appropriate, suitable investment options. However, it will be wise to be careful and understand the features before investing and check the suitability.
Convenience:
With a fast-paced lifestyle, one would prefer investment products that can be viewed and managed online. One may consider other options like acceptability as collateral security, loan availability, nomination, and third-party transferability.
Evaluating investments with the above parameters can lead to long-term financial well-being. If a person cannot evaluate these factors himself, he can take his financial advisor's help. Being wealthy in life is not only making the best investment decisions but also avoiding bad decisions.
By Team Wealth ATM
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Mutual fund investments are subject to market risk. Read the scheme-related documents carefully.