Investors
always look for good investment opportunity, which not only gives good returns
but at the same time want their investment to be safe and secure. Investors
also want liquidity i.e. flexibility to withdraw the funds in case of
emergency. It is important to know that you will not find a single product
available in the market which will give you maximum of all three i.e. safety,
liquidity and return. You have to decide in the beginning what are your
expectations from a particular investment. If you want safety than you will not
get higher return and if you want higher return than undoubtedly there is risk
inbuilt. The same holds true for returns on any investment in the products viz
a viz liquidity. Higher liquidity will
give you lower return and vice versa.
Recently
one of our clients came up with illustration of insurance plan and was seeking
our advice whether he should buy it or not. He explained to us that he has to
pay a premium of Rs. 300 per day for twenty years and he will get Rs. 2 crores
at the end of term. It was very much clear from his discussion that he was not
just impressed by the absolute number of Rs. 2 crores but also was very much
interested in buying the product as his retirement plan. We asked him as to
whether he has calculated the annualised return, which he did not. We calculated the return and told him the
annualised return is approx. 18% per annum which is too high to expect from an
insurance plan. We added, if you are expecting return of double than bank fixed
deposit then there is undoubtedly higher risk attached to it. We also tried to
explain him and asked him to check the risks attached or any false promise
given to him which is never likely to be honoured.
Another
client came with a proposal of investment in real estate fund which was
projecting expected rate of return of 30% p.a. Interestingly hurdle return
given in brochure was only 10% p.a. The minimum investment was Rs. 25 lakhs.
The fund tenure was minimum 7 years. The fund was likely to invest funds in
debenture and equity of unlisted companies. The presentation of the scheme
clearly mentioned risk attached to the schemes. There were five risk mentioned
in the presentation such as execution risk, developer risk, man management
risk, regulatory risk and financial risk. Instead of looking at these risks,
our client was more tempted to invest due to higher rate of return promised to
him. One should note that real estate market in India is neither organised nor
regulated. Real estate investment
requires lumpy investment which is also not liquid.
The
expectation of higher return without understanding the risk involved mostly
amounts to speculation and sometimes leads to big financial loss. Most of the investors invest without clearly
knowing the features of the products and also the without evaluating the risk
attached to that. You should also note that higher risk does not always mean
higher return. Debt and Gold are considered to be safer investment whereas
investment in equity and real estate are more risky investment. Before
finalising any investment you should know your time horizon. You should avoid
investment in equity or real estate if time horizon is less than five years and
should go for debt instruments for a shorter duration of time. You should also look at tax implications on the
profits made on such investments. Therefore it is always advisable to invest
with proper study and take informed decision.
This article first appeared at Tribune on 24th September'2012
