Investing money for the long run is a surefire way to generate enough wealth to attain financial freedom or work towards a particular financial goal. Whether it’s your retirement, or a year-long vacation in Cancun, it’s pertinent that you stick to your investment regime till you attain your financial goals.
While SIPs are an amazing way for a beginning investor to get started on investments, investing a large amount of money directly in the different instruments available can also prove beneficial. If you have a windfall, or a lump-sum saved up, and are wondering how to invest large amount, don’t worry – you are in the right place.
Before going into the details of where you should invest money in India, you should understand certain basic principles first. For instance, while investing a lump-sum amount, it is important that your portfolio is diversified a bit to ensure that your risks are hedged to a manageable level. Here are some of the key principles that you’ll need to follow before beginning your investment journey.
- Understand your risk-profile – The quantum of risk that you’re willing to take with your investments is usually defined by your risk profile. For instance, equity investments are considered to be a risky instrument, while government bonds and Fixed Deposits are considered relatively safe.
- Understand Your Financial Goals – Long term investments usually happen to reach a certain financial goal. Whether it’s your retirement, or the purchase of your dream house – you’ll need to define your goal monetarily, along with an understanding of when you’ll need the money.
- Your risk profile will directly depend on your financial goal, and the time frame. The longer the time frame (and higher the percentage of money necessary to be earned), the higher the risk you should be willing to take. As the goal gets closer, both monetarily and in terms of the time-frame, your risk profile should naturally levitate to some of the safer instruments, in an effort to safe-guard your investments.
- Try not to put all your eggs in one basket. Keep your portfolio diversified. This will minimize your exposure to any one type of risk – for instance, even if the Equity market is on a bear run, your debt instruments and gold bonds will continue to rake in money.
Now that we’ve understood the basics, let’s now go into the different instruments that you can utilize for investing a lump-sum.
Share Markets- Equity
Equity Investments are considered to be one of the most attractive forms of investments in India. When you invest money online in Equity shares of a company, you’re essentially buying into the ownership of the company. Each stock represents a share of ownership, and if the business you’ve invested in performs well over time, the value of your investments are bound to increase.
The short term volatility is high, and there is a non-insignificant risk that your principal gets wiped out – the reasons why the equity market are considered risky. However, the upside potential is also high – 17% returns per annum, on average (as of 2017). In comparison, when you invest money in FD (Fixed Deposits), you can expect an average return of around 5%, and the annual inflation rate in India is somewhere around 7%. You do the math.
It is no surprise that the percentage of share market investment in India is gradually growing year-on-year, thanks to increased financial literacy levels in our country.
Share Market – ETFs
ETFs or Exchange Traded Funds are becoming extremely popular in the recent times. ETFs are a type of financial security that passively tracks any index, asset class, sector, or a commodity, and can be traded/purchased/sold in a stock exchange just like an equity share can be.
Different ETFs can track different indices, or even asset classes. For instance, the SBI Nifty 50 ETF tracks the performance of the NIFTY 50 Index, while Gold BeES tracks the performance of gold as an asset class.
Market risk is the biggest thing you’ve to worry about when it comes to ETFs, as short term volatility can tempt you to take a loss, and withdraw money prematurely. The risk is directly dependent on the underlying asset/sector/index. For instance, the Gold BeES are considered relatively less risky, as compared to say an ETF which tracks the automobile sector in India.
Debt instruments are the asset classes that require a fixed payment to the asset holder, usually along with interest. The institutions/companies/organizations that issue debt instruments borrow your funds, and in turn, are obligated to pay you back the principal after a set amount of time, along with a fixed rate of interest. The rate of interest depends on the organization issuing the debt instrument.
Even if you haven’t made any huge steps into your personal finance yet, you’ve probably already invested in debt instruments. For instance, when you invest money in FD, you’re essentially purchasing a debt instrument. The bank has to pay you back the principal, along with a fixed rate of interest, usually around 5-6%.
Debentures, company deposits, public provident funds, National Savings Certificates, etc are some of the most popular debt instruments in India.
When compared to equity investments, the risk element involved is definitely less. Some debt instruments are considered safer than others – for instance, company deposits are considered riskier than say, investing in the National Savings Certificate. In most cases, you’ll get at least your principal back, but there is definitely a non-insignificant risk of default.
If you don’t have the time or resources to research individual shares, or debt instruments, you can choose to entrust your money to professionals who will invest in your stead. Professional investors, managed by prominent Asset Management Companies (and regulated by the Securities and Exchange Board of India), will pool the funds from many other retail investors, and come up with a strategy to invest in the different instruments. In return for investing your money for you, conducting regular research and coming up with stocks to invest in, the asset managers charge a small percentage as a fee.
There are many different types of Mutual funds in India, and are classified based on multiple criteria. This could be the level of involvement of asset managers (active funds, and passive funds), market capitalization of the companies involved (large cap, mid cap, small cap and hybrid funds), instrument invested in (equity funds, debt funds), or tax savings benefits (Equity Linked Savings Schemes, and other funds).
Irrespective of the type of mutual funds, all mutual funds investments are subject to market risks. Investors are advised to thoroughly read all the scheme related documents, understand the risks involved before investing.
Investing In Gold
In India, you can’t visit a single household without someone asking you to invest money in physical gold. Gold is almost “holy” so to speak, and is the investment instrument of choice for many individuals, despite there being many “better” alternatives available (speaking purely from an investment perspective). Gold has returned an average of 5.7% CAGR (Compound Annual Growth Rate) over the last decade, despite being considered less risky than some of the other instruments available.
However, there are also other costs involved in investing in physical gold. The making and wastage charges eat away a significant percentage of your investments, lowering your already low returns on investment.
“But, how else do I Invest my money in Gold?”. We hear you. The Government has heard you as well. The Government has come up with special instruments called “Sovereign Gold Bonds”, which allow you to invest money in gold, without the handling or wastage charges. When you invest money in gold bonds, not only are you exposed to gold as an asset class, the government also pays you a hefty 2.5% simple interest on your investment per annum (making gold a relatively attractive alternative for risk averse individuals).
However, the Indian sentiment towards gold jewelry shouldn’t be undermined. The ornaments also have other functions, which aren’t covered in this article – this post purely looks at physical gold from an investment perspective.
Investing In Real Estate
Real Estate Investment in India is another popular vehicle to grow wealth in the long run. Real Estate here doesn’t only mean investing in houses for you to live in. It can also involve commercial real estate (extremely lucrative, with a high barrier to entry), and real estate investment trusts (funds that invest in real estate on your behalf – think of REITs as mutual funds for real estate).
The Indian Real Estate market is considered to be extremely lucrative, with expected valuations to reach over $1 trillion by 2030. However, the value of the property depends on many factors, including the location, condition, and quality of the real estate asset purchased.
The returns gained from real estate investments are two fold.
- The Capital Appreciation of land and buildings, over a period of time.
- Rental Income gained.
The main barrier to investing in Real Estate is that there is a high cost to entry. Depending on where you’re purchasing, a half-decent apartment can cost you north of INR 1 crore easily.
If you’re particularly wealthy, and want to diversify your portfolio even wider, alternate investments like vintage cars, valuable paintings, pieces of art, NFTs and cryptocurrencies come to mind. Keep in mind that these investments are considered particularly risky, and are not advisable unless you know what you’re doing. If you’re a beginner investor, it is highly recommended that you stay away from alternate investments.
Cryptocurrencies in particular have gained in popularity over the last couple of years. However their volatility and the number of scam and memecoins involved make it particularly risky for amateur investors to start investing in them.
How to Invest in These Different Asset Classes?
Different asset classes require a different method of investments. For instance, for purchasing physical gold, you’ll have to visit a gold smith, real estate, you’ll have to meet with the seller, and in the case of equity shares, you’ll have to open a Demat and Trading account. While we can’t provide you the details of the best place to purchase real estates from, we can surely tell you where you can invest money online – through Goodwill.
Goodwill Wealth Management is a well reputed name in the brokerage industry, and offers you the ability and the tools to purchase a variety of assets. Whether you want to invest in mutual funds, IPOs, Pre-IPOs, equity shares, REITs or even ETFs – all you need to do is open a free Demat and Trading Account online. Goodwill assures you access to all these different instruments at a very low cost – Equity delivery, for instance, is completely free! What are you waiting for, sign up with Goodwill now!