Investing is a purchase of assets with an objective to generate regular income, profits or capital appreciations, which can be sold in future. There are multiple investment products like real estate, bonds, equities, gold etc. with varied features and benefits. Choosing the right product is most critical part of investing process. One should carefully analyse attributes of the asset before investing in an asset. Below we have explained the important factors that should be seen before investing in an asset.
Liquidity of an investment, is the most important thing that an investor should watchout for, before putting money in any product.Liquidity refers to the mechanism of converting the investment into cash or merely selling the investment. Listed share of a company is easy to sell than a property which is located in an elite area. Thus, equities are liquid investment while real estate is an illiquid investment. Tradtionally, Gold is also considered to be a liquid investment. However, cash and saving bank balance are the most liquid products, but they do not yield great returns.
A portfolio design should be such that, it has mix of all assets, so that in case of any urgent requirement , one is able to liquidate some investment . One can do proper cash flow planning for whole life or near term future,based on the personal needs, and bifurcate money into different products.
Risk is the second factor that an investor should consider before investing. Risk means the chance of not meeting the expected returns from an investment. Different assets have different risks associated with them. Equities are considered to be the risky asset while government bonds and gold are considered to be safe investments.
Before investing, an investor should understand the various risk of investing in an asset and should invest in an asset which matches his risk profile and requirement. There is no fixed portfolio for a particular risk category, however we have tried to present a broader framework of asset allocation.
Return means the actual profit we make on our investment. Return can be interest, dividend or profit on the investment. Different assets have different return potential. Empirically, it has been noted that equities give more return than other assets. However, equity also can be volatile in short term.
The below chart clearly demonstrating that equities and gold have given more return than government 10 years bond in last 20 years.
One can choose among different products, based on personal goals. For long term goals, one can invest in assets like equity or more volatile assets, However, one should invest only in fixed income bearing assets for short term goals.
Taxation is also an important factor you should analyse before investing. Investment should be tax efficient. Below is the taxation system on equity mutual funds, Debt Mutual Funds and Gold ETF.
Similarly, different assets have different taxations, an investor should carefully analyse different taxation on different assets.
At the time of making an investment, an investor should know his needs and then take a decision. An investor can have multiple investments based on his needs. Suppose one need money for child education after 20 years, then one can invest in the property since property can give a higher return in long-term with less liquidity. In case a person needs money after 2 years, he should not buy property, as it is an illiquid investment and takes some time to sell. He should also consider the taxation impact on his returns because higher taxation can reduce his post-tax returns.