Which is the best way to invest 10 lakhs rupees in India? How it will be the “best way”?
It can be the best way if, it can generate reasonable returns without high “risk of loss” associated with it, right?
So the keywords are two:
- Reasonable returns, and
- Low risk of loss.
A combination of these two can make an investment best.
This combination will become more important when investments are done in “lump sum“.
In fact, the bigger is the lump-sum amount, more specific are the requirements from investments.
In Indian context, Rupees 10 lakhs investment in one-go is a reasonably big amount.
So if we can learn how to efficiently invest this amount, other values can be dealt with.
There will always be a “threat of loosing money” associated with investments.
Least risk investments are around, but their returns are only minimal (example: bank deposits).
But there are better ways to invest lump-sum amounts like Rupees 10/20 lakhs.
In this blog post we will see how one can plan investing such amounts effectively.
Invest by limiting the risk of loss, how?
There is a way to manage the risks.
The trick lies in selecting the right options, and keeping portfolio well diversified.
What are right options? Those options which are within your comfort zone.
What lies in comfort zone? Those investment options about which we have more awareness and knowledge.
Yes, knowledge is the key here. Investing in options about which we do not know is like inviting future losses.
This becomes even more important if one has to invest 10 lakhs or more.
People who have bigger appetite for investment (like 10 lakhs etc) does so by managing the associated risks wisely.
Like us, people who invest bigger amounts are also doing it to earn good returns. But not at the cost of large risk-exposure.
“Low risk and high return” are priority for all type of investors.
Important is to understand the following:
- What is my risk appetite?
- What lies within my boundaries (risk limit)?
- What are my expected returns?
When one is dealing with investment, answering the above 3 questions are must.
How to know the risk appetite? Continue reading, there is an easy suggestion in this blog post (#3.2)
How to improve ones risk limits? Take a back step (specially beginners).
First unlearn what you think you know. Start reading about the following:
- Debt linked plans.
- Equity based mutual funds.
- Stock research.
- Investment diversification.
- Portfolio building.
I do not have Rupees 10 lakhs for investing….
When a common man will have 10 lakhs to invest at a time? Probably never, in majority cases.
So why I am writing an article on such a subject?
The point here is not that, “when one will have spare 10 lakhs rupees, how it should be invested”; here the focus is on the approach towards investment.
Even if one has Rs.500 to invest, but if it is done with a mindset as if Rupees 10 lakhs is getting invested, makes a difference.
What is the difference?
When amount is small, people tend to invest money casually. Why?
Because even if the money is lost, it will not hurt, as the quantum is small.
But when the amount is big like 10 lakhs, person will never invest casually.
Are you able to see the logic?
Important is to develop a right frame of mind.
Big investors who invests Rupees 10/20 lakhs at a time, are exposed to even bigger risks than us. But they still do it, how?
They have a suitable mindset (also knowledge) to deal with those risks.
If we can also build a mindset (knowledge) like them, success is like guaranteed.
Even when one is investing smaller amounts, if it is done with the right approach, profits will follow.
Hypothetical case of “inheriting” 10 lakhs
Why I am talking about inheriting as an example and not something else?
Inheriting is a very apt example of people receiving unexpected funds and not knowing what to do about it, right?
Though inheriting is an exaggeration, more practical cases can be like: gifts from parents/relatives/friends, bonus from company, sudden surge in profits/investment etc.
What people do in such cases, generally?
The sudden influx of money makes us mad and we start thinking about how to spend the money, right?
Why we behave like this? Because we do not know how to handle unexpected fund inflow.
As a result, we rather prefer spending the whole lot instead of investing.
See, how confused we get when unexpected funds arrive.
We are not able to decide where to spend it (which is our strong point), leave aside the possibility of wise investment (which is our weak area).
What is the point?
Sudden influx of larger amounts of money makes us confused. This is the time when we shall invest it wisely.
Instead, what we do? We resort to “bad spending” (not even good spending).
[Note: What is good spending? Purchase books, subscribe a gym, help parents/family etc]
Learning how to invest 10 lakhs is a case of training our mind, to think like a professional investor.
If we can map our brains like this, half the battle is won.
So, how to invest in a better way?
You inherited Rs 10 lakhs from your forefather. Inheriting money is good, but difficult is to use it wisely.
Wise utilization of money can be done by investing it in right options.
So, which are the best way to invest 10 lakhs in India?
A wise investment is one that generates good return even in difficult times.
Which are these options? No single investment option can guarantee this.
Best way is to bifurcate the money between the following:
- Equity – 40%.
- Debt – 60%.
#1. Equity Investing: Risky
When stock market is bull (like in 2009-10) earning good returns is easy.
But such bullish stock market continues only for a short time. Mostly, the stock market is either bearish or sluggish.
If one knows how to manage investment in bearish market, he will do well in all situations.
Now you can ask, I have 10 lakhs to invest (which you inherited) how to do it wisely?
World learned a tough lesson during 2008-09 financial crisis. After suffering heavy losses, people have become resistant to equity investing.
In those tough times, people found solace in keeping their monies locked in bank deposits or other debt plans.
People bought less of direct equity (stocks). Even indirect equity exposure through mutual fund fell dramatically.
When people become averse to risk-taking, market becomes bearish or remain sluggish.
There is one important lesson to learn here about “risk management”.
Always remain risk averse when it comes to investing.
Risk aversion does not mean “take no risk”. To become risk averse, investment know-how of the investor must increase
Riding a car at 325Km/hr is a huge risk.
But when the driver is Michael Schumacher, the same risky option converts itself into a billion dollar sport like Formula 1.
Professional investors invest a lot in risky options. But the difference is, they do it after lot of deliberations and research.
This way, they take calculated risk and not blind risk.
But we will discuss about equity investment later. First lets learn to secure the majority portion of funds.
How to do it? Debt based plans will do it for us.
#2. Investing in Debt (Risk Free)
Regardless of the type of investment vehicles, there is always certain level of associated risk-of-loss attached to it.
Even our so called risk free options pose some risk for its investors.
But it is true that, here the risk is bare minimum.
When we are talking about lump-sum investment, spreading 60% of our money in following debt plans will be a good idea:
- 10% – Savings account (term deposit).
- 25% – Bonds.
- 25% – Debt based mutual funds.
#2.1 Savings Account & Term Deposits
These options can generate risk free returns in range of 3.5% to 7.5% per annum.
Though being a savings account, it still pose some risk of loss. Recently we have seen how much Indian Rupee has devalued. At one time it was trading at Rs 45/$. Now Indian Rupee is close to Rs 70/$.
Such devaluation of currency drastically reduces our purchasing power.
It also leads to higher inflation. This further complicates the situation for common men.
Banks keep providing the same interest rates on savings deposits (which is already low).
Our deposited money keeps getting devalued as returns of result of forex valuation and inflation.
Though our savings account give a fixed interest, but it is too low. Here our money is depreciating instead of appreciating.
So to invest 10 lakhs in India, one must look for alternatives giving higher returns.
But while investing, one must never ignore the requirement of “liquidity”.
Keeping money safely parked in savings account (or banks term deposit) ensures sufficient liquidity.
Keeping money in banks (10%), will be a good idea when one is dealing with lump sum investment.
Bonds can generate yields in range of 7.0% to 8.5% per annum.
Bonds are traditionally one of the safer investment option. The risk associated with bonds is inherited from its issuer.
Government issued bonds will yield slightly less, but are very safe. The are not safer than bank deposits.
Corporate bonds yield are higher. But are less safe than government bonds (G-Sec).
One day I heard one of my friend saying that government bonds can never fail. This is not true. Even government bonds can fail.
Consider the example of Eurozone crisis (like Greece). Generally government issues bonds to public to raise money.
The raised money is then used to fund economic growth. Increased economic growth means more taxes for Government.
A part of those taxes are used to pay returns to bond holders.
In Greece the expected growth could not be reached. The result was, bonds failed to give its expected returns.
This situation was not limited only to Greece. Neighbouring countries like Italy, Portugal, Spain etc faced the same problems.
This is also true that G-sec failure happens rarely. So investing in them is advisable.
Corporate bonds are not as safe but G-Secs and AA+ bonds are good enough.
So, one of the best way to invest 10 lakhs in India, is to do it in bonds.
Though it’s yield is low but considering that they are safe, parking a portion of the corpus here is best.
I will invest partly in bonds (25%), and put the balance in other high return options.
#2.3 Debt based Mutual Funds…
It can generate returns in range of 7.5% to 9.0% per annum.
Debt linked mutual funds are safe only if inflation remains at moderate levels.
Average inflation in India in last 5 years was close to 6% p.a (thanks to low crude oil prices).
In India, we are accustomed to higher inflation rates (than 6%).
What high inflation means to us?
High inflation means, net of inflation returns of all debt plans will be below par.
But one thing is sure, returns of debt based mutual funds generally beat inflation by 10 to 15 basis points.
Higher inflation rates (than 6-7%) are deadly.
If inflation is high, it plays like a silent killer for the accumulated corpus.
Still inclusion of debt funds in investment portfolio cannot be ignored. It works like wonders for investment diversification.
I will invest partly in debt based plans (25%), and put the balance in other high return options.
So this brings is to end of our debt based investment options.
What’s the next step?
When we opt for risk-free investment in India, zero risk is only a misnomer.
Till the inflation is kept under control, the invested money is actually decreasing in its buying power.
In a high-inflation environment, which is the best way to invest 10 lakhs in India?
The possible escape route for common man is to practice long term investment strategy.
In long term investment, one is not obliged to invest only in risk free options.
Long term holding allows one to invest in Equity as well. How?
Equity is risky, but long holding time will balance the odds. What does it mean?
The longer one can hold the equity, more are the chances of earning higher returns.
So how long one shall hold equity (stocks) to make decent profit?
Staying invested for more than 5 years is a good idea.
So this is all? Buy equity and hold for more than 5 years? High returns is guaranteed this way?
Yes, almost done. But there is one more hurdle. Which equity to buy?
Yes, this is where, planning equity investment becomes necessary.
#3. Plan equity investing…
Check how much risk you can take?
Before buying equity, analysing ones risk profile will give an edge.
This small step will proves more than useful in times to come.
#3.1 Judge your equity know-how:
A person who has more knowledge about equity can manage higher risks comparatively with ease.
A novice is most likely to loose money in stocks because of lack of know-how.
Lack of knowledge of equity only enhances the risk of loss.
Generally speaking, investing in options that we know, increases our risk taking capability. How?
Informed investors takes calculated risks. How?
Suppose you want to buy a share “X”. You went ahead to take advice from your colleague. This colleague advised you against buying “X”.
But over internet and in newspapers, “X” is making a lot of buzz. Experts seem to talk highly about it.
Who are these experts?
These are people who know how to do fundamental analysis of stocks in detail.
What is the difference between your “colleague” and “experts”?
Your colleague cannot calculate do stock valuations & analysis. What he suggested you was more out of his gut-feeling.
But will a stock price honour peoples gut feeling? No.
But they will certainly honour the following 2 points:
- Analysis of business fundamentals, and
- Accurate price valuation.
Does your colleague know anything about it? No. but experts know it.
This is the reason why, though “X” may be looking risky, but expert investors upon analysis, is still favouring “X”.
This is what is called as calculated risk. In equity investing, it is essential.
But not everyone can take calculated risks. Only experts can.
So, become an expert. It is not as difficult as it sounds.
What to do?
Spend considerable time analysing companies business fundamentals & their price valuations.
More awareness about the stock and its underlying business will help to negate the associated risks.
So ones you are over with the limitation of “knowledge”, take the next leap…
#3.2 Quantify your Risk Taking Ability:
Quantifying ones risk taking ability is a very important step. This is a great tool to mitigate investment risk.
To understand your risk taking ability, ask a simple question to yourself.
How much money I can afford to donate without compromising my life style?
Answering this question should not be a tough task. Just imagine yourself flushing Rs.500 down the drain.
This money will never come back to you.
This loss will create problems to you in payment of upcoming bills, purchases, enjoyment etc?
If the answer is NO, probably Rs.500 is the amount which is your maximum risk taking capability.
Try quizzing yourself with higher amount (1,000, 2,000, 3,000, 5,000 etc). Do not stop till the answer is YES.
Repeat his exercise several times before arriving at a conclusion.
Few years back when I did this exercise for myself, the value which I could arrive at was Rs.1,500/month.
This was the amount which I could like put in the drain without even noticing it. This was my maximum risk taking ability (Rs.1,500/month).
How ones maximum risk taking ability helps in investing?
It helps one to diversify his/her investment portfolio (within equity).
Suppose you want to invest 10 lakhs Rupees in India. Out of 10 lakhs, you want to invest 40% in equity.
It means, you have Rs.4.0 lakhs to be invested in equity.
Idea is to first bifurcate Rs.4.0 lakhs into 3 parts:
- Direct Stocks.
- Index Funds.
- Equity Mutual Funds.
In what proportion one can bifurcate the funds between above 3 options?
I will like to do this for myself:
Please note the values indicated under the column heading “Stocks”:
- Beginner: Rs.75,000
- Expert: Rs.2,00,000
What are these values?
These values suggest that, if I am a beginner, I am ready to loose Rs.75,000 out of my Rs.10,00,000. What does it mean?
Even if the value of Rs.75,000 worth of stocks becomes zero, it will not hurt me much.
This value is my maximum risk taking capability.
A person who is interested to invest 10 lakh in lump-sum in India, can do so in bonds, debt funds, equity and diversified schemes like mutual funds, ETF’s etc.
Bonds: Both Government Bonds and Corporate Bonds trad in secondary market.
The way people buy stocks from secondary market, bonds can also be bought in the same way.
But if one wants to invest a lump-sum amount like 10 lakh, allotting a maximum of 25% to bonds will be a better idea (mainly corporate bonds)…read more about bonds purchase.
But before putting money in bonds, it is essential to keep aside some cash (25% in bank deposits etc).
Debt Based Funds: I personally like debt funds for several reasons. First of it motivates me to keep the money locked for long term. How?
Steady growth is the main attraction.
The surety of returns is always there in debt funds.
Spreading money all over in debt based funds is a good idea.
Having said that, we must also be aware of the fact that debt plans yields low returns. Hence allotting not more than 25% here will be better…
Read mode about how to invest retirement money here…
Equity: The balance what remains for equity investment is 40%. First check how comfortable you are in investing 40% of 10 lakhs in equity.
If the value needs some modification, do it. Idea is to get exposed to equity only within ones comfort zone. Next do what is most important, fundamental analysis of stocks.
And now buy stocks.
It will be better to distribute funds equally between direct stocks, equity mutual funds, and ETF’s…
Read more direct equity investments here.