Have you thought about where to invest?

Written by Lisa Pallavi Barbora

Lisa Pallavi Barbora is a Senior Consultant for Content at WFAN. Lisa is also a founder of MoneyPuzzle.in In her earlier avatar, she was a National Writer and Consultant for HT Mint - a premier business journal in India.

January 22, 2022

Photo by Pavel Danilyuk from Pexels

Investing is easy. Download the latest and most popular investment app, open an account within 30 minutes, link it to your bank account, upload scanned copies of your identity and address proof, press enter and voila you are ready to invest.

It’s true that thanks to technology, the process of making an investment is indeed very easy, but that does not necessarily translate to, investing being easy.

Let me explain the difference. Have you were wanted to cook an exotic dish, pulled out the YouTube recipe and followed the steps, but at the end of it, your dish doesn’t quite look like the one they show in the video? I’ve had a fair few experiences like that in my kitchen!

Cooking is about the experience. It is not just following a recipe that’s important, but you must also understand how ingredients react to heat, how and when to season and many other such small nuances, which only become second nature with time and experience.

A good plate of food is about using that experience to combine ingredients, in the appropriate proportions and with just enough seasoning. It requires technique, experience and a thought towards the taste buds of those who are going to eat the meal.

After all, the best cooked tandoori chicken may not taste delicious to one who has an aversion to the taste of chilli, just like a delicious plate of cheese pasta won’t do well for one who loves spicy food. I love rajma chawal and my husband is fond of good mutton curry, both achieve similar results on the health front (loaded with protein), but I would never pick mutton curry over Rajma.

Picking investment products is a bit like that. You have to be in the right universe of products, basis your life goals, but within that, what is preferred and suitable is unique to each investor. Arriving at this is not something that’s achievable in 30 minutes.

How can you filter out the universe?

The easiest way is to go with the recommendation of an online broking or distribution website if you are not feeling confident about making these choices. More often than not, the recommendation that pops out will be a potentially high return product like an equity stock or mutual fund. The most popular and in-demand scheme or stock.

However, this is not necessarily what you need.

Understand that return does not come from thin air. There are risks involved. Some of these risks are manageable and you can absorb them, some are not.

How can you know which products carry the relevant risks for you and which don’t?

Before you get into analysing the risk-return trade-off for each financial product on offer, what you need to do as a first step is right down your reason for investing. Why are you seeking a return on your capital? Are you looking to get rich? Are you saving for retirement? Is it your child’s higher education that’s a money goal for you? Is it that you are saving to buy a house?

Whatever that goal is, you need to articulate it, so that you are clear about what you want to achieve with your money.

Money that you need for a down payment on a house purchase in the next 12 months, cannot be invested in the equity market. Unless you have clarity on the goal, you can very well end up making the wrong choice of investment.

Once you know your goal, you can decide the type of financial product that will work for you. Equity stocks, mutual funds and any other equity-linked products are good for your long term goals, which have at least 5-10 years or more to completion. For any other requirements which are shorter-term in nature, you can choose a combination of fixed return and market-linked debt investments like deposits and debt mutual funds. Insurance is for protection, it is not an investment and gold is best used as jewellery, again not a very fruitful investment.

Funnelling the details

Next, you must consider the performance statistics of the investment option that best suits your goals. Any online broking or distribution site which you use will have these comparisons for your to sample.

What you need to remember is that the highest return is not always the best choice. Instead, look for consistency in returns over longer periods of time. Whether it is a managed fund or a single stock, volatile movement in price is not suitable for compounding wealth. What you need to look for is a steady compounding of return.

The supporting factor here is quality. Good quality stocks, funds, bonds and deposits are what can make the difference to your portfolio. While bank deposits are considered safe and secure, over the last two years we have seen that where bank management or promoter quality was a concern, the deposits and deposit holders have suffered.

Hence, quality is a key factor in making your investment choice. Moreover, good quality, means that it is managed in a way where your consistent, compounding of wealth happens over time.

The problem arises in analysing these details of performance and quality.

As someone who may not be involved in financial services or investing, you may find it very hard to assess the details, despite having the information.

If this is the case, then best to reach out for help and get an advisor who can hand hold you through these choices and help you pick out the most relevant fit for you.

Whatever your situation, do not take shortcuts when it comes to making investment choices. Think about where you want to invest and more importantly, why you want to make that investment. Blindly chasing return will take you down dark alleys loaded with risk. Write down your goals and follow the right checks and balances to get to the most relevant investment choices.

Remember also, if this is a bit too much for you to do by yourself, outsource it to a trustworthy advisor.

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