Managing investments correctly means quality of life.

Life and Money!

My father used to say:

The real blood in your veins is the currency notes in your pocket. Without money, you are dead and doomed off.

It may sound exaggeration but take a look around at real poor. A person with no asset, no home and worse with no job force to find something from trash. Any how, we can not all work 8-12 hours every day. We may start with that and then we accumulate surplus and lean on surplus to earn for ourselves as we struggle with our aging bodies, to maintain quality of life. If you have never thought in these terms it is time to do so, now.

How to achieve consistent return on investments?

This is a daily worry of a vast majority of people. Losing money on stock, commodity or currency is everyday routine talk. Rarely one would find a person who would be able to tell what to do with investments. Actually India has highest rate of interest on money kept in bank deposits but it rarely adds up. It is worse in the west. The position can be summed up like this:

With FD rates tumbling to 7% range from 9% range in just two years, everybody is talking about making long-term investments to protect your investments from further rate cuts (experts are predicting another rate cut by RBI in coming policy meeting on April 5, 2016. But one may wonder where to invest for long-term as interest rates are revised every year for PPF, NSC, KVP, Post Office deposits, senior citizen schemes etc.

In case of FDs, the present taxable rate of around 7.3% becomes very unattractive for higher tax payers as the post-tax return falls to 5.11% for 30% tax payers, 5.84% for 20% tax payers. So, even 6% tax-free return in long run now becomes very attractive.

But the worst is inflation. Presently around 6% it had risen to 16% in past few years this eroding the return altogether. While earning from salary or professional income it may not hurt much but once in retirement or otherwise disabled, it hurts very much.

There are three modes of investments:

Never keep all eggs in one basket. spread your eggs around.

1. Real Estate or Immovable Property:

This could be self occupied house and/or office. Besides it can be an additional house or commercial property let out for return. Multiple properties even if small and in different prime properties will do better than one large property in suburb.

If the property is at prime location it can be very liquid and prices do not fluctuate. Otherwise a good long-term investment with a minimum lock-in period of 5-10 years. 50-60% of net worth should be invested in such fixed assets. Rate of return would be inflation plus 10-20% annualised. In some cases it can be more. Everything depends upon development of locality if it is not already not  developed.

2. Instruments/bonds/pension funds/deposits:

Mutual funds and Life Insurance are for imbecile. Mutual Funds be idiot only if we join new fund and the stock markets are down. Surprisingly they are very poor managers and do not hedge the way they should. But one time non endowment life insurance policy can be good only for heirs. Endowment policy has very low return of about 2-3% maximum.

Recently Govt Bonds have also been launched for retail sale. It is most secured long-term investment. These can also be pledged for short-term requirement.

Fixed deposits with banks earn lesser interest of about 7% which is lesser than post office but the latter has limitation as it is for micro saving. A spread between the two would be interesting. Fixed deposits with companies with consistent track record, is also a good option.

About 30% of net worth must be parked in these investments.

3. Trading in the market for consistent returns.

Predicting  markets is not easy. It doesn’t matter if it is stock, commodity or currency. However one must not venture more than 10% of net worth in these speculative ventures. This max limit is for experienced. For beginner start with small amount and try not to lose it over a period of 1-2 years. If your corpus is intact after this period, continue to practice more. If you lose your corpus, forget about the whole thing and never head in this direction.

One may earn about 30% maximum per annum. But that is for experts. Anything upto 2% per month is very good. One can park funds in fixed deposit and do trading against this security while earning interest on deposit. This will bring about  0.5%  extra interest per month.

Therefore anyone promising anything more than 24% annualised return is promising moon shine. Beautiful but impossible. Stay away.

To be a successful investor one has to be trader. The two terms are not mutually exclusive. Invest like investor and hedge like a trader. Keep long-term investments but keep changing hedging as the price changes to earn profits. Never think of windfall profits but focus on consistent returns.

Did not understand last part? Wait. I shall write about that soon.

About Sandeep Bhalla

A lawyer, thinker, author, Linux/Ubuntu power user and sometime an economist or gardener or philosopher or cook or photographer depending upon the current thought and environment. View all posts by Sandeep Bhalla

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