The current crop of investors may not vouch for older generations’ affinity to put the hard-earned money in bank fixed deposits and gold for the simple reason that times have changed.
Let us take a ring-side view of some age-old investment mantras which trade pundits are no longer chanting.
Fixed Deposits are fixed after all
Raghav, a young professional, followed his father’s advice to park Rs 100,000 in an FD for a period of five years at a rate of 8 per cent. At the end of the deposit tenure, you may be forgiven to think that his invested capital has increased by Rs 8,000 by way of interest. This amount just about negates the erosive nature of inflation, so his ‘invested capital’ remains stagnant at Rs 100,000.
The fruits from FDs are lower than other investment avenues. If Raghav had been ready to take an educated risk and invest in debt bonds or equity, his capital could have increased. Also, there are penalties for premature withdrawal from FD accounts. This further reduces the effective yield.
Real estate not the real thing
‘Water, water everywhere, not a drop to drink’ rang true for Shrikar, a businessman, when he had to foot the hefty emergency medical bill of his wife. Unfortunately, he had invested a major chunk of his money in real estate, which has liquidity issues. Though Shrikar had land and property worth Rs 2 crore in and around Chennai, he had to take a loan from a friend to pay medical bills amounting to Rs 300,000. This is because it was not possible for Shrikar to liquidate his land assets in a short span of time.
Real estate investment has certain riders attached to it. Apart from the illiquid nature of the asset, it requires a minimum sum of investment for the purchase itself to materialise. For instance, the minimum down payment for a decently sized property would run into Rs 10-15 lakh – a sum that may not be within immediate reach of many unless planned for by building a corpus for it.
Not so glittering gold
On April 27, 2015, gold investors registered a loss of Rs 110 per 10 gram of gold, as the gold prices eased following falling demand from jewelers and retailers. That’s volatility in gold prices for you. Sharp changes in any commodity’s prices can send shivers down the spine of investors; this is all the more exacerbated in the case of the yellow metal. Though gold has been a perennial favorite for Indians, the past three years have only brought negative returns.
Gold prices, to a great extent, rally around the international market trend. The US Federal Reserve has given indications that it may hike interest rates. If that materialises, the dollar would rise, which would usher in a bearish trend for gold at least for another one year. Slackening demand, both in India and China, the largest consumers of gold in the world, is also taking the sheen out of the precious metal. Less demand means lower prices, but profit out of future trade is doubtful as the prices may go further south.
Piggyback on equity market
The conventional view that the equity market is beset with landmines does not hold water to many aggressive investors such as Vividh, who bought 100 shares of CCL India (Products) Ltd for Rs 95 in August 2014 and exited in April 2015 for Rs 220 making a profit of Rs 125 per share. That’s what Vividh gained for shouldering more risk.
When you exclude equity markets from your investment portfolio, you forgo a golden opportunity for your wealth to grow exponentially by taking certain calculated risks. For example, if a person had invested Rs. 2 lakhs in stocks in 1992 when the index was 2020 points, that amount may be around Rs 30 lakh now going by the present Sensex of 27,176 points. This is the crème de la crème of the equity market. Unlike real estate investment, equity market has high liquidity and the shares can be converted into cash with the click of a mouse.
Financial advice handed over from generation to generation come with their own grain of wisdom. But, one needs to change with time and move with the tide. The key is to identify a mix of investment decisions by tapping the wisdom of the past and attuning to the opportunities of the present.
Illustration: Uttam Ghosh/Rediff.com
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