The previous year - 2014 had been a roller coaster for investors, with the year starting with a bang and the markets going ever higher through the year, to end at over 30% yearly returns. The current year is poised to give investors moderate to good returns. Let us take a look at a few investment options that can reap benefits in 2015.
Equity mutual funds offer the advantage of not requiring constant monitoring the markets, and ensuring that one need not be a seasoned investor to take advantage of the returns provided in the equity markets. These funds come in a variety of ways, such as index funds (which track the return on the index and are one of the best investment options for the long term), diversified funds, sectoral funds, etc. Each of the funds caters to a different type of investor, and once you decide on your risk profile and financial goals, you can select the appropriate mutual fund to invest into. Keep in mind that equity mutual funds offer high returns but at the risk of high risk, and this is especially true if you are looking to invest for the short term. These are ideal long term investment options.
It is advisable to invest in a mutual fund via a SIP (Systematic Investment Plan), to avoid timing the market, since at times of rising markets one gets better prices and in falling markets one gets more units. This is an effective risk management tool, and one can get better returns using this method.
One should also keep in mind that the debt markets and the equity markets typically move in opposite directions, with the debt markets benefiting when equities are down and vice versa. Since most investors cannot keep abreast with the flow of financial information that comes through daily, it is advisable to have a monthly review of the portfolio and reallocate the corpus as required. For example, if the stock markets are doing badly and are expected to continue this trend, it is advisable to shift some portion of the portfolio into debt instruments. It is important to remember that debt instruments are much less volatile with the capital being more or less assured, as a result giving lower returns. It is always advisable to have at least 20% of the portfolio in debt instruments, and increase this mix if the economy and stock market scenario is bleak, thereby safeguarding your capital.
One should start allocating small sums of money towards retirement. An early start can be beneficial. For example, if one wanted to build up a capital of Rs 50 lakh in 15 years, it would require Rs 8,316 per month to be invested. If you skip this period and want to build this amount in 10 years, one needs to invest Rs.18,853 every month at the same rate of return. If one is in their 30’s, it is the time to take reasonable risk it is good to consider investments into ELSS funds (one can also save tax under section 80C). Else, options such as PPF or post office deposits can be considered, which is a good low risk option providing tax free returns.
Other Fixed Income Options:
Bank fixed deposits have been considered for years as one of the safest options, with investors putting money in at 8 - 10% p.a. and not worrying about capital protection. This may be a good option for elderly people with very low risk appetites who prefer to trust their banker, and are not worried about liquidity.
Fixed Maturity Plans are close ended funds which invest in government bonds, gilt, etc. to ensure capital protection along with capital appreciation. FMPs have a maturity period of between 90 days and 3 years, with the 1 year option being the most popular. The investments into these funds are safe since they invest only in highly rated government paper. However unlike FDs they do not guarantee any interest rate, and one has to take into account their past track record, investments made, etc. to estimate the interest that can be earned. FMPs can be good options in a rising interest rate cycle as they can lock in higher rates.
Risk Cover i.e. Life and Health are two very important investments that one has to make (during this phase if not earlier). Ideally, one should ensure that there is adequate cover to take care of any debts, and provide for their spouse and children, apart from other dependents such as one’s parents. It is advisable to go in for a risk cover early in life, as the premiums will be lower, giving the maximum cover for the minimum premium.