INVESTMENT FOR A BETTER FUTURE

I N C R EA S E  YOUR    MONEY

 When we are young and just start off on our career we don’t bother much about the state of our finances. But as we get married, have children and realise that as days and years pass we may not be able to provide for all the needs of our children and later for our own old age.

Money by itself is of no value. Its value is derived from its buying ability. Naturally as days go by the same amount of money will buy less and less of the same item. Though many of my readers may already be investing in various forms let us take a fresh look at many of the investment avenues available.

1. FD and RD. Fixed deposits are supposed to give safe returns. Most nationalised banks give 7.5-8.5%. Good Co-Op banks like Abhyudaya bank give 9% and over. Interest is normally calculated quarterly or half yearly so your yield may be slightly more. RDs give the same rate but yield is less as the monthly amounts do not remain for the same period. Basically you should calculate yield after deducting your tax rate. If you are in the 30% bracket you will basically earn FD Interest rate say 8.5%-3% so 6.5%. Therefore for the higher tax slabs FD is not an efficient saving mechanism.
2. Company FD: These pay higher rates and if chosen carefully (Safety ratings are always published) are better than bank FDs.
3. PPF may be at the same rates but have a tax deduction benefit. But there is a long lock in period.
4. The next level of investment is in the share market. For online and easy investment you need a trading account with registered investment houses like ICICIDIRECT, Sharekhan, Kotak etc. The different types of trading are :

SHARES – at present you can buy even 1 share in any listed company. There are 2 aspects in owning shares. The price can go up or down depending on the market and secondly the company pays a dividend either half yearly or annually. The amount will depend on the profitability of the company.

MUTUAL FUNDS: These are basically a basket of equities (Shares) of different companies so that the risk is distributed. Again the funds may be Debt oriented (in safe but low yield investments) or fully equity oriented (high risk high yield) or in-between.

ETFs: Exchange Traded Funds. These are also funds with different components mainly based on Indices or gold etc. Some of the ETFs are also sector specific like the Bank Nifty etc. ETFs are sometimes very safe but sometimes very volatile. For example if any adverse changes are made by the RBI most banks get effected and the Bank ETF drops.

NCD: Non-Convertible Debentures are a good interim choice. These have 2 parts. a) They pay a fixed rate of interest higher than banks. Sometimes 11% sometimes more. b) They are traded on the exchange so price can go up or down. If it is a good choice you can earn interest as well as appreciation in value. But your earned interest is always yours even if value dips.

 Investment gurus always say that shares must be bought with a horizon of 5-10 years because in the long run Sensex has shown a growth of 13-17% in the long term. But this is not true for individual shares. In 2008 DLF was one of the largest in the Sensex at a market capitalisation of INR 480 bn today it is at 210 bn… and share prices are equally low. Similarly Reliance shares have given poor returns. Not every common man is able to buy the shares at the lowest point. We usually enter at higher levels. And get stuck. Therefore buy good equities but always keep checking the performance at least every 3 months.

 All these are long term investment strategies. There are also short term investment methods which can give big returns but at high risk.

 INTRADAY TRADING: Intraday trading, as the name suggests, is trading for 1 day. You predict what the stock price will be at the end of the day and accordingly buy or sell (short) the stock. If at the end of the day the stock price moves in your direction you make a profit. If it goes in reverse direction you will lose. You can square up at any time of the day but at the end of the day its automatic square off. The investment is only the margin money which maybe about 20-30 % of total value. This form of trading is very very risky and even experts lose a lot of money often because the market is always unpredictable.

 FUTURES: Futures trading is a little longer term type of trading. These, like option trading, are called derivate trading. Because their value is based or derived from the underlying commodity which maybe Index or equity or commodity like sugar or lead. Futures or Options are really speaking speculative (only intention is to make a profit) or hedging (reduce risk of loss). Suppose Exide is at 145. The futures contract 2 months later is at 155. Now it depends on what you feel will be the price 2 months later. If you feel it will be 130 you will sell a contract. At expiry if price is 140 you have sold at 155 x 2000 (which is the lot size) and squared (did the reverse trade in this case buying) at 140 x 2000. So you will get a profit of 30000. For this your investment will be the margin money you are required to maintain say 20% of 3,10,000 so 62000. So your profit will be almost 50%. If the price moves adversely you can lose a similar large amount.

 OPTIONS: Options are also like futures as they are also derivatives. But are more complicated than Futures but have much better leverage and amount required is much lesser. Options are of 2 kinds Call and Put. A Call option means the price is expected to go up of the underlying. Put Option means Price is expected to go down. The main advantage of Options is that smart investors make money even when market goes down provided he invested in that direction. Options are a huge subject and I hope to deal with it in a future article but in simple terms it works like this. Every month an option expires on the last Thursday of the month. Options are available for at least 3 months. Not all shares have options. Example Exide is at 140. If you expect Exide to go up to 160 so you can buy an option with strike price of 160 but this will be at a premium of say 10. You can buy the call so you pay the seller this amount. You can sell the option you will receive the premium but you have to deposit a margin amount which maybe 20-30% of total value. Selling is complicated and will require a more detailed explanation so buying is better for starters. So you buy a call at strike price of 160 and pay premium of 10 X 2000 (lot size). From time of purchase till expiry the option price will go up or down if spot price of Exide goes up or down. This increase or decrease is based on volatility and time remaining calculated on what are called “greeks”. Suppose at expiry Exide is at 170 and option price is 20 your profit will be (20-10) x 2000 so 20000 on an investment of 20000 so profit is 100%. If Exide is 160 or below, the option price will be less than 10 and you will get a loss upto maximum of 20000. Index options are cheaper as lot size is only 25.

 It seems complicated but is not if one studies it. It requires the following to be successful:

1. It requires a regular watch on the stock and option price – at least once a day.
2. One should have a fair knowledge of how the market is behaving. You have to be right in your direction of stock or Index movement and this movement has to be soon and rapid otherwise the time decay eats away the option value.
3. It should be done only with money one can afford to lose and step by step as learning curve is longer than other forms of investment.

  The above is only indicative. Investment should always be done with proper study, advice as well as being fully aware of the risks involved. But as mentioned in the introduction one must look for good avenues of investment if one wants to enhance capital and provide for an increasingly expensive future. The earlier you start the less the stress in later life.