Why should I invest in stocks, mutual funds or bonds?
Time and again it has been proved that shares/equities are one of the best long-term investments. Investing in stock market provides an opportunity to make money. Investors will be able to reap profits by investing in stable companies that are able to grow. Similarly, by investing in different stocks, an investor will be able to increase the wealth by leveraging growth in various sectors. Moreover, some stocks do provide extra income in the form of dividends, which can be used for further investing or for other financial needs.
Mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth. ELSS – An Ideal Tax-saving Instrument - Equity Linked Savings Schemes (ELSS) offers an easy option to obtain tax benefits and an opportunity to harness the potential upside of investing in the equity market.
Bonds are considered safer investments than stocks. Tax-saving infrastructure bonds are a good option in the fixed income category. These are issued by infrastructure companies approved by the government and they offer a decent rate of interest plus tax benefits.
What if i just started working, what are my options?
As a general rule of thumb one is to allocate 100 minus ones age into equity and rest in debt. The thesis behind the rule is that we can take more risks at a younger age as we have more time on our hand (less responsibility) and at the same time the approach towards the investment can be aggressive in the accumulation period.
Several investment opportunities are available early in life. Some of them include stocks/ equities, bonds, mutual funds, fixed deposits and savings account etc.
Stocks: Also called equities, stocks are the cornerstone to most retirement accounts because they've boasted higher returns than many other investments.
Bonds: When you buy a bond, you're essentially becoming a lender; In general, bonds are considered safer investments than stocks. Local and state governments also issue bonds.
Mutual funds: An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, market-related indexes, and other investment opportunities. As the money is managed by financial professionals in mutual funds, you can avail the services of professional fund managers by investing in mutual funds. In addition, mutual funds also provide the benefit of diversification across different sectors and companies. .
How do I know which is the best investment opportunity for me and my family?
Before you leap into any investment decision, there are some important rules you should follow:
- Set your goals: Decide what it is that you are trying to achieve. Where do want to be at some point of time in the future? What is the final outcome that you want from your investments and what is your time frame?
- Know your risk profile: You need to know what type of investor you are – essentially, how much money are you willing to lose?
- Know how you want to invest your money: What mix of investments suits your investor type? Bonds, shares, property, bank deposits? Will you invest directly yourself or use managed funds?
- Spread your risk: As the saying goes, don’t put all your eggs in one basket. Spread your risk around different options and different companies.
- A commonly cited rule of thumb has helped simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 40-year-old, 60% of the portfolio should be equities. The rest would be comprised of high-grade bonds, government debt and other relatively safe assets.
Further, you can get all your stock queries answered on ‘Ask The expert’ feature available on KarvyOnline.com
Will I need to keep investing every month or can i just buy stocks or bonds all at once?
It is always better to buy stocks and bonds over a period of time, it averages out the cost.
What if I want to sell the financial instruments before term ends and take my profit or loss, will i be charged a penalty?
It depends on the instrument you have invested in. Generally there are few clauses in the instruments to restrict investors from early withdrawals. Also there are tax implications if someone withdraws the money and incurs gain on that. It is always better to keep aside a part of your income into contingency funds like liquid funds which can be capitalised in case of emergencies and we don’t have to touch the investment for the same.
I am going to retire soon? Can I invest and get a monthly interest as income?
Out-Living your resources possesses a very high risk during your retirement years, choosing you’re a correct asset allocation is critical for a successful retired life. Their many products one can choose from to start receiving immediate income (annuity). Some of the products that can offer you immediate annuity include bonds, FDs, Post office MIS, tax free bonds, annuity plans from life insurance companies. Factors such as product specific risks, lock-in-period, taxation and liquidity should be considered along with your asset allocation strategy before finalizing a product or a basket of products.
As a parent can I invest in my Childs name and save it for their future? What are the risks?
Yes, one can as parent invest in their child’s name and starting early also gives you the benefit of compounding. Traditional options such as Public Provident Fund and FDs and the most popular saving tools amongst majority of parents due to assured returns and tax rebate associated with these products. However, given that the cost of education is escalating at a pretty high rate in India, products such as Child Unit linked Insurance that offer cover of education cost in case the parents expire. These plans are bound to generate higher returns over the traditional plans given their market participation. The risk associated with these plans is similar to that of mutual funds schemes. Lately the central government has also introduced schemes to save for girl child offering 1% higher rate than that of 10 year government security. While, investing it is always recommended to invest in a combination of products.
What are the different financial instruments available?
Several financial instruments are available in the Indian money market. These are government securities, or G-sec, preference shares, commercial papers, equity shares, certificate of deposits, call money market and industrial securities.
Government Securities: In India, mainly the institutional investors buy the government securities. Both the Central Governments and the State Governments issue them. Commercial banks are the biggest investors who buy the G-secs.
Preference Shares: These carry a fixed dividend rate and a special right to dividends over the private equity holders. Currently, all the preference shares in the Indian market are redeemable, that is, they have a fixed period of maturity.
Commercial Papers (CP): These are issued mainly by the corporate businessmen to fund their working capital needs. Commercial Papers are issued generally for short-term maturities.
Equity Shares: It is a "high return risk" instrument. Equity shares don't have any fixed return rate and thereby, no period of maturity.
Certificate of Deposits (CD): These are very similar to the Commercial papers. But the CDs are issued mainly by the commercial banks.
Call Money Market: The loans made in the call money market are mainly short term in nature. Call money market mainly deals with the interbank markets.
Industrial Securities: Normally the big corporate bodies are used to issue this to fulfil their long-term requirements regarding working capital. The debentures and equity shares fall under this category.
If my mom or dad already has stocks, can I inherit their shares?
- By way of transfer or
- In case of their death, thru legal proceedings or
- Through a will / gift
What are a SIP/ ELSS/FMP?
SIP- or systematic investment plan is a mode of investment, wherein the investor makes periodic investment (monthly, quarterly, yearly) in the particular investment instrument. The major benefits of SIP are to average down our investment (Rupee cost averaging) to reduce the volatility in the portfolio. Also salaried individuals can opt this option to invest from their monthly salary.
ELSS: equity linked saving schemes as the names suggested is one of the type of mutual funds scheme. These funds offer tax benefits under Sec 80C of income tax, according to which investment up to Rs. 1.50 lakhs is deductable from taxable income
FMP: Fixed maturity plan are type of debt fund where the investment portfolio is closely aligned to the maturity of the scheme. FMPs are somewhat different than a fixed deposit in a bank. FMPs are debt schemes, where the corpus is invested in fixed-income securities
Why do disclaimers say mutual funds are subject to market risks? What have those got to do with trading, I thought they are fixed interest.
Mutual fund investments is a market linked products and subject to expected volatility in the underlying securities. One of the key aspects of mutual fund is that they are traded on recognised stock exchange thus provide liquidity to investor. Over a long period of time the market risk gets lower and provides an opportunity for wealth creation.
How much is the minimum for investing in stock markets or sips?
A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investor save regularly. It is just like a recurring deposit with the bank where investor put in a small amount every month. The difference here is that the amount is invested in a mutual fund.
The minimum amount to be invested can be as small as Rs 100 and the frequency of investment is usually monthly or quarterly.
What if I am in college and what to invest my pocket money, will I need my parent’s signature?
If the applicant is below 18 years of age then Guardians signature is required otherwise not.
What if my pocket money is only 500 per month, will that be enough to invest?
Yes, the minimum amount to be invested can be as small as Rs 100 and the frequency of investment is usually monthly or quarterly.
How soon can I see profits if I start investing today?
Investing is a long-term process and one should not expect immediate returns for the product. The typical investment horizon for an investment in equity and equity linked products ranges from a minimum of 3 to 5 years. There are many reasons why you should stay invested for a longer time such as erratic market movements during shorter periods which can lead to equity markets giving negative returns, long business cycles, government and regulatory changes, global and local events, micro and macro events and to benefit of power of compounding etc. If you have an investment horizon below this then you should park your money in to safer asset classes such as debt schemes from mutual funds and Bank FDs
When I make a profit should I be paying a certain amount to Karvy as charge?
There is nothing you need to pay on making profit.
How will I know when my stocks or mutual funds are in profits or losses?
You can track the performance of your stocks and mutual fund by logging into karvyonline.com
Will I need an adhaar card or pan card to invest?
Pan Card is mandatory for investing. Adhaar card can be submitted as an additional proof.
What if I want to invest in my parent’s name, so they have money after they retire what to invest in?
Financial independence is of very high importance to people at retirement age. Contributing towards their retirement would go a long way in shaping a happier retirement picture for your parents and less worries for you in terms of financial impact on your other goals. It is recommended to buy a proper health insurance cover first and then proceed towards investments. There are many non complicated products that one can choose to invest-in such as monthly income schemes of post office regular interest paying bonds and immediate annuity plans of Life insurance companies. One can also target regular income in the form of rental income for residential or commercial properties. Some may also find source of income (though not guaranteed) through their holdings in equity stocks. However, it is always advisable to have a combination of products in the retirement basket.
Why can’t I just invest in a bank and get interest, why take a risk like this?
Not taking the risk is the biggest risk one can take when it comes to investment. Just consider this hypothetical example: You have 100 Rupees today from which you can buy 10 bottles of water. You decide to invest this Rs. 100 in to saving bank account which gives 4% interest. Now after a year when you withdraw Rs. 104/-( Principle 100+ Rs. 4.00 interest) you will not be able to buy 10 water bottle as by now the price of the bottle has increased to Rs.11 per bottle and cost of 10 bottle will be Rs 110/-. Instead of not taking risks we can take calculated risks by investing a part of our hard earns money into equity which can take care of the monster called “inflation”. And also the investment in bank fixed deposits is secured up to Rs. 1 lakh, only protected with insurance over and above that amount it is also not secured.
We witness many examples in our life where people struggle to keep their standard of living intact or settle down with less luxury because they don’t plan their finances in their early days. It takes only Rs.6000 per month to invest and have corpus of Rs. 1crore at the age of 50 for a 25 year young earner (assuming: ROI @ 12%).