How To Multiply Your Money?

At 28, Shobhan has managed to save Rs 60,000 for investment. As a first-time investor, he is weighing all the options open to him. Since he wants to be a regular investor he is interested in knowing the type of investments he can make, important conditions for these investments and the options that are influenced by them.

Investment planning requires a great deal of attention to details and an alert investor ensures that he/she has taken care of this important aspect. In helping Shobhan choose his investment options, we will discuss at length several points that are very vital from the investment perspective.

Period
Investment planning is not a one-time activity. You cannot make an investment and forget about it. You need to monitor your investment regularly to ensure that it is achieving its stated objectives. Shobhan should consider the existing Rs 60,000 plus future investments that will go on to building a quality portfolio. This also means an increasing responsibility as the period and portfolio increases. For example, after two years there would Rs 1 lakh to monitor that can become Rs 3 lakh after 5 years, and so on. Investment planning also has to be started as early in life as possible so that there is adequate period available for your money to grow. In this respect, Shobhan is in a good position as being only 28 he gets more than 30 years for his money to grow till he retires. Consequently, this eases pressure of making large investments.

Risk element
Every investment comes with a risk attached, depending upon its exact nature. This risk element represents a possible loss when the investments are made in a particular area. So, if you put Rs 50,000 in equities there is a chance that your amount becomes Rs 80,000 or Rs 25,000. In the latter case, it will be an erosion of capital. Different people have different risk appetites, so if you do not want to lose even a rupee you would be opting for safe instruments like a fixed deposit or the one backed by the Government, but if you are willing to take greater risk for greater return then equities would be a better option. If you have invested Rs 50,000 in the former you will get Rs 50,000 back plus the return. A person like Shobhan will prefer to go in for debt investment at the first stage along with a small proportion in equity which can rise over a period of time as he develops more confidence in the investment process. Thus depending upon the risk element various investments can be classified separately and this has to be considered in the process of selection.

Returns
There are various types of returns that are possible for different investments. It is necessary that you the investor match your requirements in terms of earning return along with the possibility in a particular investment. For example, there are some investments where the return is fixed and is known at the time of making the investment. Public Provident Fund has a return of 8 per cent that is known, similarly the National Savings Certificate has a return of 8 per cent compounded half yearly. Choose these investment options if they suit your requirement. On the other hand, there are equity shares and mutual funds that invest in equities where the return is not limited. Here, the annual return can go as high as 50-70 per cent but there could be a similar kind of loss also. Shobhan should understand that knowing the return at the time of investing is not possible and hence the actual position can be known only once the time period is over.

Time period
The time period for which the money can be invested is essential as the life period of the various instruments has to be matched with it. Every investment made by you is for a specific time period because there are alternative uses of the money which can be required at other places. So if you have Rs 25,000 you can either invest this or spend it on buying a new LCD TV. There are investments that mature in a few days like a fixed deposit for one month or a bond or a debenture maturing after 5 years. If you need the money say Rs 30,000 after a year for a family wedding then the choice of the instrument and the time period have to ensure that the money is liquid at that point of time. There are areas like equities where the shares can probably be present for perpetuity. But in this case you have to decide the time period for which the investment is being made and select the shares accordingly. The assumption and expectations about other factors can then be made accordingly

Liquidity
One of the most vital factors to be considered in any investment is the liquidity that it will generate for the investor. One of the routes that ensures liquidity is the ability to sell the investment. This enables you to know how quickly the investment can be turned into cash. Mutual funds and equities have a high liquidity because of the turnover and ready market. At the same time, there can be other means of raising liquidity, like a loan against the investment. In this respect, the NSC has high liquidity but not the Government of India bonds. The shorter the period for cash conversion the better it is for an investor.