Thursday, 15 August 2013

How to make money during bad times

The last few weeks have been extremely turbulent and volatile for the Indian financial markets. Stock markets have been moving up and down in crazy frenzy moves, bond yields have been galloping upwards resulting in falling bond prices, precious metals (gold and silver) hitting new multi-year lows and the striking of them all – the Indian rupee hitting all time life time lows. Keeping up with the current mood, lot of investors would be contemplating as to where to put their hard earned money with an eye on return “of” and return “on” their money. This article attempts to dissect the different opportunities available so as to bring to the fore the best investment option for you in the current turbulent times.

The investments options can be dividend based on liquidity, risk, time horizon as well as the category of the asset itself - debt, equity, commodity or real estate. Without making an attempt to confuse the reader, the table below provides an overview of the various asset classes, the time horizon, type of risk, what kind of return to expect, suitability as well as the timing of the investment in a clear logical manner so as to aid the decision making process.


Investment Option
Asset Class
Investment Time Horizon
Type of Risk
Intensity of Risk
Return Expectation
Suitability
Comments
Liquid / Ultra Short Term MF
Fixed Income – Mutual Fund
Very Short Term
Credit Risk
Very Low
Low
For parking surplus funds
For temporary parking of funds – a superior alternative to Bank Savings Account
Short Term Plans
Fixed Income – Mutual Funds
Short Term
Credit Risk & Moderate Interest Rate Risk
Low
Comparatively Low
Opportunistic Superior returns for short term funds
For short term better investment in an inverted yield curve scenario
Income / Gilt Funds
Fixed Income
Medium to Long Term
Credit Risk & High Interest Rate Risk
High
Medium to High
Opportunistic Superior returns for medium to long term funds
For medium to long term opportunistic investment in a steep yield curve scenario
MF Fixed Maturity Plan /
Fixed Income – Mutual Funds
Medium to Long Term
Credit & Yield Curve Risk
Low
Medium
Fixed Return for Fixed Duration
As a superior tax saving alternative to Bank Fixed Deposits. Ideally done at the peak of policy interest rate hike cycle.
Bank Fixed Deposit
Fixed Income – Banks
Medium to Long Term
Yield Curve Risk
Very Low
Medium
Fixed Return for Fixed Duration
Less tax efficient as compared to MF FMPs. Ideally done at the peak of policy interest rate hike cycle.
Balanced Fund - MF
Hybrid - Equity + Fixed Income
Medium to Long Term
Credit, Interest Rate & Stock Market Risk
Medium
Medium to High
Ideal for Asset Allocation
Balance of risk, return, asset allocation with maximum tax advantages
Direct Equity or Mutual Fund
Equity
Long Term
Stock Market Risk
High
High
For long term wealth creation
Moderate Risk for superior return – higher risk and tax adjusted return
Physical Gold or Gold Fund
Commodity
Long Term
Commodity & Currency Risk
High
Medium to High
High risk for higher inflation adjusted returns
For betting on the movement of a commodity and currency
Physical Real Estate or Real Estate Fund
Real Estate
Long Term
High
Moderate to High
Medium to High
Undefined Risk in expectation of return
At the peak of the interest rate cycle when property prices have just started rising
International Fund
Primarily Equity but can also be commodities, bonds or real estate
Medium to Long Term
Global Market and Currency Risk
High
High
For diversifying into difficult asset classes along with assuming currency risk

High unknown and un-measurable risk in expectation of better returns


Conclusion

To conclude, there are many simple and avoidable mistakes which investors mutually commit at the time of investing. Simple logical things work far better in the market place rather than complex algorithms, theorems, valuations principles, DCF etc. Returns from investment come only because of two numbers – cost and selling price. This article makes an attempt to bring out the cost price factor by letting you know which is the best investment option for you. There is no other place to test your virtues than the market. All the qualities which make a successful human being will be tested by the market –it has its own method of finding and exploiting human weaknesses. Investing is not about beating the market or anybody else, it’s simply beating your own self, your own negative traits and once you are able to master your own self and become a complete human being, then only you would also become a successful investor. Articulate your investment goals, know your time horizon, recognize your risk appetite, understand your need for income and growth, invest regularly although it may be in small lots, do your thinking and research and after doing it don’t panic just because the market went against you, accept your mistakes and flaws and follow the above mentioned simple rules and principles to select the best investment option for you.



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