People, who did not develop the habit of investment, can still invest in their thirties and forties as they still have 20-30 years for investment and building wealth. Let’s look at some of the options.
Investing in equities
Equity market has been the best avenue for investors who have a long-term horizon. Equity market fluctuates widely in short term but goes up over the longer horizon. Equities give a return of 12 to 20 per cent over the longer run. Hence investors in their thirties and forties can invest in stocks directly. Investors can also invest in equities through mutual funds. Investors can invest in mutual funds through SIP where a part of their salary goes into investment every month.
Investing in fixed income securities
Fixed income securities are investments that provide a fixed return. Unlike equities and equity mutual funds, where the returns are not unknown in advance, fixed income securities let you know what returns you are going to get. Fixed income securities can include high grade corporate bonds, government securities, public provident fund, fixed deposits, post office schemes, and many others such as infrastructure bonds offering a fixed return.
Every bond offering by corporates has to go through a rating process mandatorily. Rating is a measure of the company’s creditworthiness. A higher rating means the company is sound and faces no problem in paying bond investors their due, while a low rating increases the possibility of default by the company. Look at the rating before choosing the right bond. At the same time, a high rating also means the returns will be lower because of low risk. For example, a high grade corporate bond can give you eight per cent returns while a low grade bond can promise 10 per cent. The risk is higher in low grade bonds.
Since these debt instruments from comparatively good institutions, fixed income securities poses little or no risk to your investment. So your money is safe in these instruments. The returns are also lower than that of equities. These securities can give you anywhere between six and 10 per cent, depending on several factors such as interest rate, demand and supply situation, and overall investors sentiments.
Middle aged investors should not take high risk by investing all their surplus in equities. People earn their best in their thirties and forties,hence the temptation to put a large amount of money in equities is higher. However, this is not in the best interest of your investment. Invest-ors should invest a part of the savings in equity but not start gambling on tips, tricks, and rumours of stock market. In most cases, day trading and short term trading in stock markets lead you to losses, not to wealth building. So you should avoid temptation to divert a part of your income to speculative investments.
Second, avoid buying too many of insurance products in the name of investment. Insurance is for insuring that your dependents do not suffer in your absence and not for investments.
Finally, go for systematic investment plan (SIP). This is the best tool available for investors who have neither time nor enough knowledge about stock market and companies. SIP balances the fluctuation in prices over long run.
(The writer is the CEO of BankBazaar.com)
