Best investment options

Balance between asset and liabilities
When i was a beginner, my biggest investment dilemma was identification of best investment options to build a perfect portfolio. When i was in this dilemma only one thing was clear that “i want to save my hard earned money to invest it on assets and not on liabilities”. People generally save to buy a house, car, tv, motor bike etc. But we cannot ignore the need of liabilities in our live. A good house, a nice car, a furnished home, all adds to our standard of living. There must be a perfect balance between savings that is focused on buying assets and other which shall buy the required liabilities. This is the reason why i have classified savings as:

• liability savings,
• asset savings.

Differentiate between asset & liability savings
The objective of asset savings is to accumulate assets and objective of liabilities savings is to buy needed liabilities. People often forget to do this differentiation in their savings. People save and then invest on assets like shares, bonds etc and ultimately redeem to buy liabilities. This is not right, savings focused on assets should always buy more assets and never a liability. The fund generated by liability savings should be used to buy liabilities. With this concept, we will briefly discuss the affect of the above two types of savings on your financial independence:

• Asset savings – makes you richer,
• Liabilities savings – makes you poorer but increases your standard of living.

It is not sufficient to think about savings and investment in isolation. The savings should make you richer and parallel increase your standard of living. If an investor can manage this balance then he can be sure to reach his goal.The goal of asset savings is to give the investor a financial independence. Financial independence decreases the investors dependency on their job. Investors who is 100% financially independent no longer needs to do job to earn their livings.

Lets assume that an investor decides to save and invest $100 equally among asset saving and liability saving. At this the choice of a suitable investment options becomes most important. The choice of investment option is dependent on the time span for which you can keep your savings invested:

• Asset savings – long term investment
• Liability savings – short term investment.

Investment time horizon for asset savings is minimum 5years. It means if you buy one a share today then you must not sell it for next 5years. Liabilities investment has time horizon of 1year to less than 5years.

Goal based investment options/ investment vehicles
Investment options like shares and mutual funds (equity linked) are best choice for long term investment options. Bank fixed deposits and recurring deposits are best choice for short term investment options.

• Asset savings – invest on shares and equity linked mutual funds
• Liabilities savings – invest on bank fixed deposits and recurring deposits.

You can read more about need based investment option here “Investment-options”

Financial Independence & Investment Options
The money an investor allocated to asset savings and to liability savings is very critical. If you are saving more for liabilities then your speed of becoming financially independent will be slower. If you saving more for assets then you will be always short of funds to buy the needful liabilities. It is very important to know your optimum levels of savings. In most cases you will find that your savings are not enough to buy the needful liabilities at the desired time. In such situations do not cut you budget of asset savings, you must look for other avenues to meet the deficit. This is one reason why so many people start doing business (work from home types) to make up for this deficit.

Best Investment Options / investment vehicles summarized below in term of short term and long term investment objective for quick reference.

Short-term investing

• Savings bank account

Savings bank account can be considered as investment option only for investment period below thirty days and no more. The advantage of savings bank account as an investment option is that it gives very high liquidity to investors but returns are negligible as compared to other investment options.

• Money market funds

Money market funds are better investment option as compared to savings account because it can promise the same level of liquidity and can give higher returns.

• Bank fixed deposits

Bank deposits of best for those investors who would like to invest their money not more than a year. For investors who would need their funds after one year then perhaps band deposits are the best investment option for them.

Long-term investing

• Post Office savings

As post office savings are managed by Indian Government, it offers very low risk and above all gives income tax benefits (under sec 80C) to its investors. For novice and new investors who is just starting to take a plunge into the world of investing probably post office savings can be the best investment options to start with.

• Public Provident Fund

Public provident fund also give income tax deduction under section 80C. I feel this investment option will work best for those investors who fall under high tax bracket and are not interested to take high risks to meet their investment goals.

• Company fixed deposits

Companies fixed deposits gives slightly better returns than bank fixed deposits. For those investors who would like to have better returns with slightly more risk appetite can opt for company’s deposits. If a good company like L&T, ICICI etc is generating funds by means of company deposits then it can be the best investment for long term investors.

• Bonds and debentures

Very recently Indian government has floated infrastructure development bonds to generate funds for infrastructure projects. These funds not only gives higher returns than bank deposits bust are also very safe (risk free) and give income tax advantage over and above section 80C.

But my personal favorite and best long term investment option are:

• Mutual Fund Investing &
• Stock Market Investment Option

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