For a 34-year old B Vamsi Krishna, a manager in a mid-sized private company at Andheri, Mumbai, it was difficult to decide on an ideal investment option for Rs 50,000 he had saved from his salary. After talking to friends and the neighbourhood financial planner, he decided to invest the sum in equities through the mutual fund route.
Krishna is not alone. There are increasing instances of salaried people of varying ages, from the mid-30s to late 40s, who are being drawn to investing in stocks and shares, once considered to be a risky proposition.
However, with equity markets on a sharp upswing, even those with modest investible surplus are opting for the stock market over traditional options of gold and bank fixed deposits. The rate of returns from these three asset classes is the main driving force for such a change in sentiment.
While, goals or the purposes of making the investment — child’s education, house renovation, family vacation, etc — are important, it is equally vital to also consider the risk-taking ability, say investment advisors.
If the person is young, then she can invest a large portion of the investible surplus in equities and the rest in debt instruments or fixed deposits.
Most advisors, however, cautioned against gold as the yellow metal has been volatile and is no longer considered to be the most popular investment option.
“We believe 2015 is the year for investing in a staggered manner in equities with a three to five year horizon since the outlook (for the economy) is good over this period,” said Nimesh Shah, managing director and chief executive officer, ICICI Prudential Mutual Fund. “However, if the investment horizon is lower (for a year or two), then debt mutual funds appear more attractive than fixed deposits. Allocation to gold, excluding holding in jewellery, should not be more than 5-10% at any given time.”
The sharp rise in returns from equities has encouraged most investors as they compare two traditional options — gold and bank deposits.
The BSE’s Sensex has risen 43% in the period since January last year, while gold was up 4.3% in the same period. Most banks offer interests ranging from 8.50-8.75% on fixed deposits of Rs 100,000 for a period of one year.
Financial advisors say that their advice to clients is always based on individual goals and risk-taking abilities and not mainly on returns or for tax-saving purpose.
“It is difficult to generalise as everybody is different and has different needs or goals,” said certified financial planner Gaurav Mashruwala. “If the need is for your child’s education, then the recommendation will be different as it is long-term depending on the age of your child. Investment options cannot definitely be decided on returns.”
Gold, the time-tested preferred investment option for salaried people, has lost much of its attraction as the prices have behaved erratically in the past couple of years. In January last year, gold was at about Rs 24,480.31 for 10 grams. This rose to Rs 25,547.60 last week, a rise of about 4.3%. The yellow metal has failed to act as a hedge against inflation, where bank fixed deposits have fared comparatively better.
For instance, an investment of Rs 50,000 in a fixed deposit in Allahabad Bank for one year at a coupon rate of 8.75%, the amount on maturity comes to Rs 54,521.
“Investment decision should not be done lumpsum,” said Harsh Roongta, an investment adviser registered with the Securities and Exchange Board of India and director of apnapaisa.com.
“Most people make the mistake of investing in equities when they are high and exit when the markets start correcting. You must take timing out for investments. Given the government’s sops for small investors, you can invest Rs 1 lakh in ELSS (equity-linked savings scheme) for one year. But, anything more than that should be based on goals and allotted accordingly. Investment in stocks should ideally be for a longer duration to get maximum benefits,” he added.