3 things to consider while investing
While investing, there are basically 3 factors to be considered for making a good investment. They are Safety, Liquidity and Returns.
Safety in an investment is when an investment you make gives you good returns with relatively less or negligible risk. Liquidity is the ability to convert any given asset into cash quickly. In case of investments, liquidity is basically the amount of ease with which you can buy and sell the asset you invest in. Returns are the monetary benefits you earn through your investment. Depending on the tenure of investments, the weights allocated to these factors change.
If you are planning to buy a flat in next 3 years you will need to invest the money in hand in such a way that you can realize the money after 3 years without loss of value and possibly earn some returns. If you invest this in equity(stock market), in case of an adverse market situation, the value might go down by 10 to 15% in the 3 year period. So it is better to invest the money in bank deposits, as the investment is short term.
Suppose you are retired and have invested your money in bank deposit for 5 years at interest rate of 9%p.a. You have invested Rs.20 lacks and will monthly get Rs.15,000 as interest. You need Rs.10,000 now to meet your expenses. Pretty safe investment, you might think. But consider this. After 5 years, the expenses might have gone up to Rs.13,382 assuming an inflation of 6%p.a. If the economy is doing well, the bank will reduce the interest rate. When you go to renew the deposit they’ll say that the interest rate will be 7%p.a. Hence, from there onwards you will get only Rs.11,667 per month as interest. This is the risk with bank deposit.
So what do we do? In this case you should be investing a portion of the money in equity. If economy is doing well, then equity prices will also go up. This will compensate for the reduced rate of interest.
The focus should be on safety and liquidity for the short term and on returns for the long term. As you can see, right investment is different for each person. A financial plan will help you identify the right investments for you based on the time horizon of each goal, your risk tolerance and your current financial situation. Click here to start your financial planning now.!