Amiya Sahu speaks about making investment choices and factors to be considered in the selection of investments.
This is a follow-up article to my last one. In the article I had highlighted ‘Why we should invest?’ and the dos and don’ts of a ‘good investor’. I also highlighted what is important to be a successful investor and to create wealth over a long period. This article is a step ahead in the journey. It is aimed to understand how we should go about making our investment choices. Further, I explain what factors to be considered in our selection.
There are several choices for an investor in the market viz. Equity, Debt, Mutual Funds, Commodities, Forex, Derivatives and others. Under each segment, we have sub-segments. For example, in equity we have large, mid-sized and small companies. There are also penny stocks (low priced i.e. below Rs. 10). In the debt market, the choices are Fixed deposits in banks and financial institutions, corporate bonds and even government bonds.
A host of commodities are available for investment which further can be categorised as industrial viz. crude oil, copper, aluminium, nickel, zinc, palladium, etc.; and agricultural viz. turmeric, soybean, jeera, channa, coffee, cardamom, black pepper, orange juice, rice, sugar etc. Foreign currencies also make good investment choices. The popular one in India are US Dollar, Euro, Pound, Yen. The most popular in the world market are USD, YEN and Swish Franc. The precious metals such as gold, silver, platinum, palladium also add to the choice of investments.
Derivatives are a new set of investment vehicles which derive their values from other assets. Hence, there are derivatives on equity shares, bonds, commodities, forex and also on interest rates, energy units, etc.
Mutual funds provide a platform to all investors to make use of their professional expertise and experience of seasoned investors who manage the investments on behalf of other investors. There is a plethora of choices in this segment.
We can only add more to the list e.g. business, real estate, art and antiques. What is more important is to understand how do we select from this big list. To help an investor decide, certain factors should be considered. In the following section, the factors are described.
The foremost is the ‘purpose’ of investment. One could make a choice between, (1) long-term wealth creation and (2) speculative investments. In the first case, equity shares of large companies can be considered as the first choice. On an average, they have created more wealth than smaller companies; and would most likely continue to do so. Commodities make a good choice if one wishes to be speculative and take advantage of the cyclical nature of the changes in their prices. The prices change with demand supply imbalances.
While wealth creation using equity and commodities offer possibilities of higher growth, they come with higher risk as well. Debt instruments protect the risk of loss and are a better choice if the purpose is capital protection.
Another important factor for investors is the availability of‘investable capital’. If the choice is to make regular investments of smaller amounts, the method of Systematic Investment Plans (SIPs) is good. The beauty of SIPs is that it can be applied to invest in many assets viz. mutual funds, equity shares, bank deposits, gold and silver, and the like. It is affordable and convenient. On the other hand, if one has large amount of investable capital, he/ she could wait for market corrections to invest in large tranches to maximize returns.
One more factor is ‘risk appetite’. One who is hungry for higher returns should be open to riskier choices among equity, debt, commodity, derivatives and even mutual funds. Intelligent choices would be following: (1) large companies in equity, higher rated debt, higher rated mutual funds. We can add gold and silver. Among equity, companies which have higher growth possibilities would help in creating more wealth.
Finally, should one do the selection on their own? The answer is yes, only if one is able to spend time first, on acquiring the ‘requisite knowledge and skills’ and then is able to spare time to plan, execute and monitor. A better choice is to engage professional expertise of wealth or investment advisors. Ensure you have a plan and the advisor is unbiased!
Happy Investing! Create tons of Wealth!
The writer speaks about making investment choices and factors to be considered in the selection of investments.
