23/03/2011

Tips for safe Investment and wealth creation!


Now days, there are many option available for wealth creation but only requirement is money and right investment with discipline. Investment can be divided into broader two categories i.e. Equity related investment and debt related investment. Before selecting a suitable category of investment, it is advisable to take the opinion of expert person from investment advisor, if you have to determine the suitable category of investment for yourself then before deciding you have to determine your risk taking capacity.

What is risk taking capacity?
There are two factors to determine the risk tolerance capacity of a individual.

1.     Financial risk taking capacity:  Financial Risk taking capacity means how much money you can afford to lose. The more money  you can afford to  put at risk, the more risk tolerance capacity you have.
2.     Emotional risk taking capacity: The Emotional risk taking capacity means how much you stressed will be when you lose money. the more stressed about the loss of money, the less risk taking capacity you have.
On the basis of above risk taking capacity, investors can be divided into three categories:
  • Conservative: These are such investors who are hesitate to take risk. They opt for safety of their principal first. They are having very low risk appetite. 
  • Balanced: These investors who likes to take some amount of risk but still prefer low risk product. They have moderate risk appetite.
  • Aggressive: Risk lover investors come under this category. They have very high risk appetite.
Once you determined yours risk appetite as per above explanation. In my view following are some investment instruments which are available for safe money making and wealth creation systematically.
1.     For conservative Investors: they should go for fixed income product which would ensure capital protection.
  • Public Provident Fund (PPF): it is very easy to open account; it can be open in any PSU Bank or post office. The minimum amount require to start investment is Rs 500/year. Disadvantage or advantage you can say, it have a locking period of 15 years during this period, it cannot be liquidated but loan can be taken against it and a partial withdrawal is permitted after six years. An individual can make investment maximum Rs 70,000 per annum. It has tax exemption under 80(c).
  • National Saving Certificate (NSC): There is no maximum limit for investment and minimum amount required to start investment in NSC is Rs 500/annum. The investment income has tax exemption but interest income is taxable. The scheme is having locking period of 6 years. Premature encashment is not permissible.. It will give an annual interest of 8%.
  • Employee Provident Fund (EPF): this scheme is for working employees. In this employers also contribute to the EPF of Employee. If you have continuously worked for 5 years, then withdrawal is tax free. Premature encashment is permissible under certain circumstances. Current rate of interest for EPF is 8.5%.
  • Life Insurance Plan: Life endowment plan where premium is costly but it will serve dual purpose of insurance and return.
  • Fixed Deposit: In this Scheme minimum amount requirement for investment is Rs. 100/year and vary from bank to bank. The locking period is five years and investment income exceed Rs. 10000/years is taxable at source. Premature withdrawal is not permitted. it have very low interest rate.

  2. Balanced: Balanced category investor can go for some product which are list under conservative categories, also can take balance mutual fund. The exposure of the following product should not be very high.
  • Unit Linked Insurance Plan(ULIP): It has dual benefits i.e. benefits of insurance and investment. The returns are tax free. But it has a locking period of 5 years. For better returns it should be started for longer period. As some portions of investments are in equity market so the investment is subject to market risk. However if investment made for longer period risk can be minimize. 
  3. Aggressive: Investor in this category can go for product list under conservative and balanced categories and also some product which are mentioned below. The exposure to equity should be high. But it may be kept in mind equity will give high return but also can give heavy losses. 
  • Equity linked saving scheme (ELLS): the minimum amount required for investment in ELSS is Rs. 500 and it also depend from fund to fund. The locking periods of all the ELSSs are 3 years. Presently investment and dividend all are tax free. Since ELSS investment are equity market so the investment is subject to stock market risk and return may be varied from fund to fund. Generally ELSSs are outperformed all other mode of investment in long term.
Conclusion: The goal of a person change as per their age, so should your investments. When a person is young and no liability of family and any other financial obligation, higher exposure to equity can be considered. As we grow older, our exposure to equity related product should go down and so should be the exposure of loan. The simple formula for equity investment is 100-your age, means if you are 30 years old the equity exposure should be 100-30=70% of your total earning.