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Where to invest your savings

, April 8, 2014, 0 Comments

Invest your savings-MarketExpressDuring these days of high inflation your savings kept in the form of cash is losing its value day by day. If the annual rate of inflation is 8% your cash holdings will lose value to the same extent in one year. In order to beat inflation we need to invest our savings wisely. There are several avenues for investment for an individual. Here we give a broad overview of various investment avenues available to an individual investor.

One of the safest forms of investment is to invest in fixed deposits in banks. Today a fixed deposit in banks will fetch you an interest of about 9% if the investment is for a sufficiently long period of time. A 9% rate of return by itself can be considered to be good. But if the investor is in the 30% income tax bracket about a third of the return he earns as interest is lost as tax. This makes his actual rate of return closer to 6%.

To get over the problem of income tax you can invest in shares. Return from investment in shares is exempt from income tax if the shares are held for a year or more before they are sold. But returns from investment in shares can be very uncertain and volatile. One should venture into investment in shares only if you know the share market very well and one is able to take investment decisions on your own. It is advisable not to invest in shares if you are going to buy and sell shares based on tips given by advisers.

Another option to beat inflation is to invest in equity mutual funds. Returns from such funds are also exempt from income tax if held for a period of more than one year. The advantage of equity mutual funds over shares is that returns from this form of investment is less volatile and one does not need expert knowledge of the share market to become a mutual fund investor.

Returns from equity mutual funds also depend on the performance of share markets. But returns from such funds are more dependent on the movement of the share indices as compared to that of individual shares. These indices being a sort of average is less volatile than individual share prices and the risk of capital loss is reduced. While the risk of capital loss is less so also the chances of making huge profits are reduced. But equity mutual funds are a safe medium for investment for first time investors and if one keeps invested in equity mutual funds over a long period chances of beating inflation are extremely good or perhaps even certain.

Debt mutual funds are even less volatile than equity mutual funds. These funds invest in bonds issued by the government and also by the corporate sector and their returns are more or less stable though expected to be less compared to equity mutual funds. People in higher age groups around the age of retirement are advised to invest in debt funds because their age and need for security doesn’t permit them to take high risks. A more attractive option for investors in higher age brackets may be investment in balanced funds which invests in a combination of equities and bonds.

Systematic Investment Plans (SIPs) are one form of regular investment in mutual funds where you don’t make huge bulk investments in one go but make regular fixed investments in desired mutual funds over a long period of time. For instance one can start an SIP of investing Rs 10000 every month in HDFC Balanced Fund and continue such investment over a period of 4 years. Investing in SIPs as against bulk investments saves you the headache of timing your investment. Always it is better to invest when the market is low and redeem when the market goes up. But timing the market is not easy and SIPs are a safe way of leaving it to chance as far as timing of your mutual fund investments is concerned.

Buying life insurance products is necessary to insure against an unexpected mishap in life. It ensures that finances of your dependents are protected in case a mishap occurs to you. Everyone having dependents should take life insurance policies. But annual rates of return on such policies are not good and they should not be looked upon as an avenue for investment and making long term returns. Besides life insurance one should also be protected by adequate health insurance.

Yet another form of long term investment is investment in real estate. Investment in real estate is done partly to ensure a roof over ones head and also as an avenue of making capital gains. While the first of these two objectives is a necessity that needs to be fulfilled the second needs to be done in moderation. A property you own is an illiquid asset and one will not be able to dispose it off at short notice to meet an emergency requirement.

Investment in gold and jewelry is the last form of investment in our consideration list. A certain amount of investment in this item is resorted to by most people keeping in view requirements of matrimonial needs of their children and also as an investment for investment sake. While the former cannot be avoided the latter is a speculative investment one indulges in. During the present moment there is great uncertainty over future trends in movement of gold prices and one can only say that investment in gold for future capital gains can prove to be a risky venture.

A golden rule one needs to follow as regards all types of investments is not to put all your eggs in the same basket. Every investor needs to have a diversified portfolio and the more successful investor will be one who is successful in building up the right mix and takes decisions of investing in the right avenue at the right time.