K S Manojkumar
Aspiring investors, who have provided for emergency funds and obtained enough life and health insurance cover, have three broad choices. They can lend their money to a business in return for an interest (debt), become a part owner of a business (equity – buying stocks or shares) or buy something which could become valuable in the future – like gold, and or a house (real estate).
Asset allocation refers to diversifying investments across above asset classes based on an investor’s goals, risk tolerance, and financial situation. A well-balanced portfolio reduces overall risk while optimizing returns.
By debt, what financial planners mean is buying a financial product which yields an assured return – like a provident fund (lending to the government), bank fixed deposits (lending to the bank) or a tax-free bond.
The entity borrowing this kind of money offers a fixed income to the investor, over a fixed period (maturity) and the money thus invested is generally considered to be safe. The amount of risk involved is low. And as is characteristics with all low-risk investments, the returns too may be low to moderate.
The investors do not stand to make any additional gains from any high profits the entities might make using their money but they may also not lose any sleep wondering whether the money they lent will come back to them. Of course, investors need to guard themselves against promises of high or exorbitant returns. Normally, only those entities who are in distress and find it difficult to borrow money from mainstream lending agencies, promise fantastic returns to attract investors.
Investing in stocks means owning a share in a business, allowing investors to benefit from its growth. Stock prices fluctuate, but long-term investment in fundamentally strong companies can yield high returns. Equities carry higher risks but often outperform other asset classes in the long run, making them a strong choice in a growing economy like India.
As far as the third group of investment (gold and real estate) is concerned, it continues to hold attraction for a large number of Indian investors despite having been proven to be too risky.
Growth in gold prices is not as consistent and regular, and people usually struggle to sell off property at the right time at the right price. Unlike other instruments, real estate cannot be sold in divisible parts, (you can sell a house but not a room). Brokerages could end up eating a large part of the profit and running into legal hassles is common in the real estate world.
For beginners, investing directly in stocks or real estate can be complex. A safer and more manageable approach is to start with mutual funds, which offer diversification and professional management.