Which investment opportunities in India are available for investors?
In a diverse and democratic nation like India, there are more investment opportunities for investors.
But the real challenge is, how to pick-and-choose those investment opportunities and create a diversified portfolio.
This article will be your guide for creating a diverse portfolio.
Kindly read all the topics point by point.
What is necessary in creation of a perfectly diversified portfolio is, knowledge about all available investment opportunities.
India offers loads of opportunities for investors.
But what will work best for me may not work for you.
Hence its essential to be aware of all investment options available.
This helps in selection of the best alternative for investing.
Investment opportunities and Diversification
People often confuse ‘too many holdings’ with investment diversification.
One of my friend considered “spreading” his money among different mutual funds as a good practice.
He did it believing that it will create a diversified portfolio.
When I looked into the holding of his mutual funds, they were all packed with equity.
In 2008 when stock market crashed all over the world, so was his entire portfolio.
Where is the diversification here?
Buying only different mutual funds or stocks is not diversification.
How to avoid such a mistake?
First, gather knowledge about different investment opportunities in India, and only then invest.
Here the devil lies in the following:
- Investing only in few investment options.
- Not knowing enough details of the selected option.
A country like India offers a huge range of investment opportunities.
Relying only on few stocks and selected mutual funds is not necessary.
The more investment options you known, the wiser will be your investment choices.
What are your investment goals
It is important for investors to segregate their investment by goals.
Idea is to practice goal based investing.
In order to make goal-based investing effective, one must have wide knowledge of investment opportunities.
In financial terms, these investment opportunities are called assets.
Selection of assets differs from goal to goal?
When we invest our money, we do it for a requirement (goal).
- If requirement is very close from today, selection of assets will be different.
- Requirements which are are distant from today, selection of assets will be different.
- If requirement is to generated regular income, assets will be different.
Hence it is very important that one must link every investment purchase with a specific GOAL (requirement).
What is my investment goal?
I invest my money to make more money
I mainly invest money for three things:
- Firstly, for family’s future requirements.
- Secondly, to generated alternative source of income.
- Thirdly, for building emergency fund.
- Fourthly, to beat inflation.
To protect my family needs I rely on capital appreciation theory.
To generated alternative income, I rely on income investing theory.
I also invest money for for building a huge emergency portfolio.
Other investment needs…
There are people who invest money to beat inflation.
There is also a large group of people who invest money for short term trading.
In this article we will segregate all investment opportunities in India on basis of following investment goals:
- Emergency fund creation.
- Earn high capital appreciation.
- Generating regular income.
- Beating inflation (not very different from #2 above).
Lets see all the available investment opportunities we have in India categorised based on ones investment goals.
Categorising all investment opportunities this way, benefits the investor.
It is the effectiveness of goal based investing that is publicised in this article.
There are so many people who invest their hard earned money. But why only a tiny majority gain success?
People who has been successful in investing, show a typical characteristic.
They all practice goal based investing.
#1. Emergency fund creation
I personally feel that creation of emergency fund is more important than any other goal.
It is the emergencies in life that eat away majority of our savings.
Hence its better to maintain emergency fund as a back-up.
Only those people who have sufficient emergency fund can invest freely. They can afford to invest in high-risk-high-returns options.
In order to take advantage of high return investment opportunities, one must build a sufficiently big emergency fund first.
Ideally one must have at least 6 months worth of expense in emergency fund.
#1.1 What are cash equivalent investments
Here, those options are identified which are considered super-safe investments.
In financial terms we call these options as cash equivalents.
We all love cash, right? Do you know why?
We have more control on the cash which lies in our wallet.
If the objective is to build emergency fund, creation of sufficient cash packed back-up is better.
But I am not asking you to hoard cash in your home. Keeping cash in locker is not wise.
Invest money in cash equivalent options.
The term cash-equivalent is used for those investment opportunities which are as safe as cash in our wallet.
Cash equivalents investment has following benefits:
- They have government backing.
- The principal is 99.99% protected.
- The fund is also very liquid. People can withdraw money whenever they like.
“Capital Protection” and “high liquidity” is an essential precondition for emergency fund creation.
But the down side of these investment opportunities is that, the returns are very low.
As the investment risk is bare minimum, hence the returns are also rock bottom.
In India, cash equivalent investment options can generate returns between 4% to 7% per annum.
But what is the harm?
Till investments are generating returns, we are actually making money.
If one consider the impact of inflation, tax liability, returns of cash-equivalent investments will be negative.
[Income generated from cash equivalent investment vehicles are taxable]
Hence, except for emergency fund generation, experts do not prefer parking money in these options.
#1.3 Investment opportunities in India for emergency fund creation?
1.3.1) Savings Account: Money kept in the savings account is considered safest.
Ideally people must keep their emergency funds in savings account.
A typical savings account deposit will earn close to 4% returns.
The liquidity of funds is also guaranteed.
1.3.2) Recurring Deposit: Emergency fund creation gets built-up gradually. Recurring deposit is an excellent option in this regard.
One can keep investing small sums of money each month as recurring deposits.
Instead of waiting for large savings to accumulate, one can start investing in RD with as little as Rs 500.
1.3.3) Fixed Deposit: It is considered safest only next to savings account.
I personally love fixed deposits as a means to park my emergency funds.
A typical savings account deposit will earn close to 7.5% returns.
The funds are not as liquid as savings account but money can be withdrawn within 1-2 days notice.
1.3.4) Money Market Mutual Funds: Money market mutual funds are also very safe investment option.
But they are not as well utilised by Indian middle class.
On an average, money market mutual funds can give 8% returns.
Money market funds mainly invest in corporate bonds, bank deposits, treasury bills, government backed instruments etc.
#2. Earn high capital appreciation
For whom capital appreciation is a priority?
People who desire early retirement.
Who does not want to retire rich?
I personally would like to lead a retire life with luxury. But the only problem is, I want to retire early.
I know a lot of people will eco my wish. In this cut-throat competing world, such desires are frequently visited.
But this is also true that I cannot afford that luxury today.
So what is the solution?
Early and luxurious retirement is like a dream.
But it can become a reality if we learn to utilise “the power of capital appreciation”.
Lets face a fact, even if we desperately want it, we cannot retire tomorrow.
It will take some time to build a retirement corpus.
Hence earlier we start the bigger corpus one can generate.
#2.1 Why invest for long term
But why it takes time to build retirement corpus through capital appreciation?
Does capital appreciation opportunities yield lower returns like emergency savings?
No, in fact the reverse is true. Capital appreciation opportunities yield very high returns.
Then why it should take more time to build retirement corpus?
There are two reasons why retirement corpus needs time.
- First, retirement corpus are big sums of money.
- Secondly, in short term, capital appreciation opportunities are very volatile.
In order to negate the effect of volatility, one must buy capital appreciation options and hold them for long term.
These are very highly volatile assets, hence also yield high returns.
But in order to allow the higher yields to materialise, one must hold them for long term.
Long term returns of these assets will beat inflation.
On an average, an equity linked investment opportunity in India will yield returns close to 12-15% per annum.
But following are the control points:
- One must hold these assets for 5 years or more.
- Do not buy in market peaks.
There are people who do not invest in capital appreciation assets.
They take a plea that because they are contributing to Retirement Plan they are protected.
More often than not, such plans fall drastically short of requirement.
Hence investing n growth based assets is essential.
#2.2. Investment opportunities in India for capital appreciation
2.2.1) Direct Stocks: Stocks provide best returns in long term.
Perhaps there is no other investment opportunity that can match long term returns of stocks.
What does it mean, can we go ahead and buy any stocks? No.
- One must buy stocks of a fundamentally strong business.
- Avoid stocks at overvalued price levels.
2.2.2) Equity based Mutual Funds: These mutual funds invest majority portion of their money in equity (stocks).
People who are not comfortable buying direct stocks can buy mutual funds.
Long term returns of equity based mutual funds can match that of direct stocks.
In some cases, returns of mutual funds even outperform the performance of individual stocks.
#3. Generating regular income
People should start accumulating alternative income generation options early in their life.
People only start thinking about alternative income generation in their middle ages.
These are those people who have realised that being dependent only on job (for income) can be dangerous.
There is still a huge majority of people for whom alternative income generation is not a priority.
These are those people who are either filthy rich or are financially ignorant.
One must divert at least 5-10% of monthly take home salary towards alternative income generation.
It may look like pea-nuts in the beginning. But over a period of time, the income generated from income producing assets will start to supplement the salary.
I have seen real life example where ones income from such assets is nearly 75% of ones take home salary.
Such people really enjoy the benefits of financial freedom.
#3.1. Investment opportunities in India for income generation
3.1.1) Fixed Deposit: Haven’t we already talked about fixed deposits in emergency fund section?
Yes but this fixed deposit is slightly different.
Here the investor can choose to withdraw the accrued interest monthly/quarterly/annually.
The sole purpose of this fixed deposit is to generate fixed income for its investors.
[Note: TDS is deducted by the bank]
3.1.2) Dividend Paying Stocks: These are not regular stocks.
These are stocks of companies which regularly shares its profits with its shareholders.
The profits shared by the companies are in form of dividends.
Example: Coal India Ltd. It is one of the biggest dividend paying companies in India.
This dividend income gets credited right into the savings account of the investor. No middle men involved.
Coal India’s current dividend yield is in the range of 6.5-7% per annum.
3.1.3) Dividend Paying Mutual Funds: Like dividend paying stocks, dividend paying mutual funds also specialise in income generation for its investors.
Generally such mutual funds pay dividends once every year.
Example: Franklin India Bluechip Fund (D). Its current dividend yield is 8.23%.
3.1.4) Rental Property: Rental income from real estate property is very assured.
Rental property (residential or commercial) regularly yields monthly income.
In the initial years, the income yield of the real estate property may be low (example: 4.5% p.a.), but it grows with time.
Every year the rental income grows to match inflation.
[Note: Prepayment of home loan on regular basis for lowering of EMI will further improve the yield.]
3.1.5) REITs: Though REITs has still not started in India but I will still mention them here.
By end of year 2018, first REITs is expected to be launched in India.
This will be perhaps the best income generating opportunity available for common man.
To know more about REITs one can visit an article already published by me.
On an average, REITs are expected to yield at least 7-8% per annum returns for its investors.
#4. Beating inflation
Inflation is a main concern of all.
It is because of inflation that our purchasing power goes down with time.
If we can only invest money to beat inflation we say that our 75% job is done.
Hence, investments that has potential to beat inflation are invaluable.
Such investment options can be referred as “opportunities” in real sense.
All investment options that deal with paper currency are bound to face the wrath of inflation some day.
The best alternative for one to safeguard against inflation is to keep accumulating hard assets.
What are hard assets?
Those assets which do not devalue with paper currency.
People often stocks, equity mutual funds etc as options to beat inflation. They are not wrong.
These investment options has returns so high that they can easily beat inflation.
But they cannot be treated as an ideal inflation beating asset.
Performance of these investment options are completely dependent on strength of paper currency.
Hence we must find an alternative opportunity that can beat inflation.
#4.1. Investment opportunities in India to beat inflation
4.1.1) Gold & Silver: It is considered as decent inflation hedge.
Investors can buy physical gold or its ETF.
Supply of precious metal is limited. Over a period of time, the demand of precious metals has only increased.
According to current trends, its is expected that gold and silver has potential to beat inflation in long term.
[Read: Which is better, gold vs silver?]
4.1.2) Residential Property: Residential property is also an investment opportunity one should not miss.
The earlier on starts to accumulate it, the better.
The capital appreciation of a well located property will certainly beat inflation.
If one can add capital appreciation and rental yield to a real estate property, beating inflation is almost assured.
4.1.3) Cryptocurrency like Bitcoin:
Now this is interesting.
I am not sure how many of you believe in cryptocurrencies. But I have faith.
Cryptocurrencies are not just like “printing paper notes”. It is a brand new technology.
We can even compare it to the likes of invention of electricity, motor vehicle, computers, internet etc.
If Central Banks do not crush this technology in its bud, this thing is going to be a global phenomenon by the next decade.
As a inflation hedge, we can bet on it.
[Read: Bitcoin explained for laymen]
I hope you have liked the information.
The idea that was highlighted here was to practice goal based investing.
From these simple example one can understand how selection of investments change with goal.
I am personally a more of an ‘income investor’.
Please tell me more about your investment philosophy by commenting below.