Principles to be observed while making investments

G.Rajasekar poto

--by CA G.Rajasekar B.Com.,FCA F.I.I.I

Chartered Accountant

Savings is the important aspect in life. It does not matter what your income or expenses; savings is a must. In the early stages especially persons residing in Gulf, savings potential will be lower. But it goes up thereafter as the salary also goes up generally. As rightly pointed by specialists that you make money (savings) first and thereafter the money will make money.

It is always crept in the minds of the people which are the best investment options. It gets accelerated especially in the situation like corona lockdowns, general economic crisis happening once in 12 years approximately. I furnish below the principles to be observed while making investments especially by individuals:

 

  • SECURITY
  • YIELD
  • PERIOD
  • RISK
  • REDEMPTIONS

1. SECURITY:

The utmost importance should be given for security of the investments. Bank deposits, secured debentures issued by banks, good corporates, gold and other certain investments are generally considered as solid. If not you might lose the entire investments or major part of it.

2.YIELD:

Of course yield i.e., Return on investments should be quiet handsome. If I quote that the rate of interest for USD used to be around 18% in 1980s, most of the people may not believe.  But currently it is 0.25% in USA and around 0.75% in India.  Considering the rate of inflation, the yield should be more than the rate of inflation.

3.PERIOD:

The lower the period, the return will be low and if the period is more, then the return will be high. It has to be correlated with the individual needs of the funds at future.

4.RISK:

The Stock (Share) Market offers high returns but it is associated with high level of risks. Suddenly the prices could fall down drastically. The metals like Gold, Silver and other commodities also fall under this category.

5.REDEMPTIONS:

It should be easy and there should be option to withdraw the money with minimum penalty if somebody wants the money urgently. If the procedures to close the investments are complicated and in certain cases it is impossible to close the investments.

Hope you would have got some idea about personal investments by reading the above, and let me discuss about various types of investments available in the market.

  • BANK FIXED DEPOSITS – DOMESTIC IRS
  • BANK FIXED DEPOSITS - NRE
  • BANK FIXED DEPOSITS – USD OR STG ETC FCNR
  • BANK DEPOSITS WITH BANKS IN FOREIGN COUNTRIES
  • DEPOSITS WITH COMPANIES
  • LAND
  • HOUSES
  • FLATS
  • SHARE MARKET
  • MUTUAL FUNDS
  • BOND MARKETS
  • GOLD & SILVER
  • INSURANCE POLICYS – INDIA
  • INSURANCE POLICYS - FOREIGN 

1.BANK FIXED DEPOSITS – DOMESTIC - IRS

Generally rate of interest for Indian Rupees is higher than other currencies. Current interest rates are in the range of 5.5% and it varies according to the period of FD. It has come down drastically over a period of time.

It is a safe investment. Under the Deposit Insurance Scheme, the maximum amount per person per bank used to be Rs 100,000/-. But it has been increased to Rs 5 Lakhs now. In the case of closure of the bank, this amount will be paid immediately and balance will be paid if there are funds in the bank upon closure.

NRIs can certain amount of deposit under this category to meet the local expenses in India.

It is taxable under Indian Income Tax Act and banks will deduct Tax Deducted at Source of 10.0%

2.BANK FIXED DEPOSITS – NRE - IRS

Generally rate of interest for Indian Rupees is higher than other currencies. Current interest rates are in the range of 5.5% and it varies according to the period of FD. It has come down drastically over a period of time.

It is a safe investment. Under the Deposit Insurance Scheme, the maximum amount per person per bank used to be Rs 100,000/-. But it has been increased to Rs 5 Lakhs now. In the case of closure of the bank, this amount will be paid immediately and balance will be paid if there are funds in the bank upon closure.

NRIs are advised to keep sizeable percentage of their savings under this category.

It is NOT taxable under Indian Income Tax Act.

3.BANK FIXED DEPOSITS – FCNE USD OR STG ETC

Generally rate of interest will be lower. Current interest rates are in the range of 0.75% and it varies according to the period of FD. It has come down drastically over a period of time.

It is a safe investment. Under the Deposit Insurance Scheme, the maximum amount per person per bank used to be Rs 100,000/-. But it has been increased to Rs 5 Lakhs now. In the case of closure of the bank, this amount will be paid immediately and balance will be paid if there are funds in the bank upon closure.

NRIs are advised to keep sizeable percentage of their savings under this category to take advantages of depreciation of Rupee.

It is NOT taxable under Indian Income Tax Act.

4. BANK DEPOSITS WITH BANKS IN FOREIGN COUNTRIES:

Though the rate of interest will be very low, the deposit insurance schemes in foreign countries are huge. i.e., Deposit insurance in USA is $ 100,000/- per person, UK it is STG 25,000.- and in Europe it is Euro 50,000.

SBI, New York is one of the best options. But nowadays a lot of restrictions are put by banks in foreign countries to open accounts. If you are lucky to open, it is good.

5. DEPOSIT WITH COMPANIES:

Generally they offer much higher rate of interest. However it is associated with the risk of the company. It has been reported in a number of cases that the companies do not honour their commitments and frauds are going on.

However well reputed companies can be considered. The Central or State or Semi Govt companies such as State Power corporations etc fall under this category. But there could be roll over instead of pay outs i.e. on redemption date they might ask you to roll over instead of making cash payments as power, transport corporations are not cash rich companies.

Default is not completely ruled out.

6.LAND

The vacant lands used to be very attractive few years before. Now it reached the peak in majority of the places. However tier 2 cities like Thanjavur, Trichy etc offer good potential.  Generally it becomes double within a period of 6 years. However in view of dull in the real estate market throughout India, the average returns are around 12% only

But one has to be careful in buying the land i.e., Title deed, whether it is approved residential layout, no encumbrance, no illegal occupation. Better to get the lawyer opinion before buying lands. In addition, you need to safeguard the property as a lot of unauthorized occupations are also happening.

7.HOUSES:

The points written for land are equally applicable.

It might take more time than land to double, though the cost of construction is shooting up every year.

There is good opportunity for NRIs. I.e. Some sellers would like to do the registration for the full value of land or house. The local Indians may avoid the same as they have to show proper accounts under IT Act. As NRIs are outside the purview for their overseas earnings, they can identify those properties and buy.

8.FLATS:

The appreciation will be very low now days. If someone has purchased a flat in the heart of the city 20 years before they would have paid around Rs 5000 per sq. Feet. It costs now around Rs 18,000/- Since it reached the peak, it may increase in the range of 2 – 3% only. Rental value would give around 3 % net.

I suggest the people to buy flats for their own use only. Buying flats for investment purposes is not advisable.

Now the flats in Chennai are being sold around 20% less than their price in earlier years.If you wish to buy, then you buy finished flat as defaults in delivering are happening, though RERA Act is active.

9.SHARE MARKET:

It is the most attractive type of investments provided you got the knowledge about companies, share market trends etc.

As mentioned earlier, it is high risk investment. Based on the age of the investor it varies. If the age is less than 35 years, he can go up to 40% of his investments. If the age is more than 50, then it has to be reduced to 20% or less.

Buying at the right price and selling at the right time are most important. If someone has invested in good companies during the corona period upto May, 2020, now the same are quoted at around 50% more. i.e. if you have purchased it at Rs 100/-, the price as on January, 2021 is around Rs 150. 50% gain within the period of 1 year.

10.MUTUAL FUNDS:

If somebody does not have the required knowledge about share market, then he can opt for Mutual Funds.

But one has to see the name of the bank or company which manages the fund, past performances of the particular fund and other funds of the company etc.,

Do not get yourselves locked with funds with high level of penalty for early redemptions.

Further the Mutual Funds of variety i.e., High Risk, Medium Risk and Low Risk and one has to choose according to his risk bearing capacity.

11.BOND MARKET

It is not much popular with individuals. One can try if the issuer of the bond is good. Central or State Govt bonds are secured though return will be less.

12. GOLD & SILVER:

Though these two metals were gradually increasing but the rate of return used to be much lower than other investments. However it gained momentum after corona crisis since Feb, 2020. But now the prices started to fall. I came down from Rs 5300 per gram of 22 carrots to Rs 4700 as of 9.1.2021.

However there are indications that Gold might move its present level of USD 1850 to USD 2200 within a year. It all depends upon the outcome of US various international factors.

However it is advisable to buy if the gold rate in India goes down to Rs 4,500/- per gram (22 carrots) and keep it.

The costs of making and coolie charges are very high which will eradicate the profits. Hence it is suggested to buy through electronic investments or gold bonds of Govt of India or as bar. Better to buy gold coins or 24 carrot bars.

There was a move by Govt of India to make the individuals to submit the receipts for the jewellery purchased. Moreover there are reports that it is relating to bars and not for jewellery. Nothing is clear as of now. But it has not been taken forward. It is better to keep the receipts with you.

Alternatively you can buy and sell Gold and Silver through online.

13.LIFE INSURANCE POLICYS - INDIA:

Generally many of the investors have the feeling that they return only what we invested and the return (profits) are very nominal or nil. It has to be understood that it is the risk coverage rather than making profit. If somebody wants to make money out of life insurance policys than he has to die, which nobody wants.

The advantage is that the bonus declared by Life insurance companies and payable at the time of maturity are not taxable under I.T. Act.

Further up to Rs 1.5 lakhs, you can claim deduction Sec 80C of Income tax Act.

If you are high risk takers you can take policy linked to share market. If not try to invest in other policys which are not much connected with share market.

14.LIFE INSURANCE POLICYS – FOREIGN:

My advice to NRIs in Gulf is that they can take Life Insurance policys of LIC International (99% shares owned by LIC of India). They are in USD denominated and the maturity value i.e. amount invested plus bonus are not taxable in India. The main advantage is that it is in USD and as such appreciation of USD against Indian Rupees will also be enjoyed by investors.

There are certain investment related policies available such as Professional Education policy and this policy guarantee the return are good.

Upon maturity you can put in RFC deposit i.e., Resident Foreign Currency Deposit in case you returned to India and become resident. You can close it and send the proceeds to your children in foreign countries without any exchange loss. For example if you convert USD into Rupees, probably the bank will quote Rs 2 less than the market price and when you buy you have to pay extra of Rs 2. i.e., in total you would be losing around Rs 4/- per USD. It can be avoided.

Alternatively you can ask them to send in Indian Rupees and they will apply the rate of exchange on the date of maturity.

RISK BASED MODULE:

The risk module is based on certain criteria which may vary according to individuals:

AGE BAND

HIGH RISK

MEDIUM RISK

LOW RISK

UPTO 35 YEARS

50%

30%

20%

36 – 50 YEARS

30%

40%

30%

50- 60 YEARS

20%

25%

55%

ABOVE 60 YEARS

10%

25%

65%

There could be other options available but one has to consider all the points mentioned in the first two paragraphs.

No investment manager can give any guarantee of the income or principal. Wrong decision could result in erosion of full or partial of the investments made. Hence utmost care should be taken while making investments so that you mind wise free after investments.

LATEST NEWS :

The FRDI bill has been approved by Cabinet of Central Govt but it has not been placed and approved in Parliament. If passed it will be detrimental to deposit holders as unpaid portion of deposits could be converted into shares of the bank. Hence keeping money in foreign banks based in foreign countries could be better option. The limit of Rs 5 lakhs under deposit insurance scheme is per person per bank.

IN order to avoid better to keep deposits with more banks with yourself and family member names so that Rs 5 lakh guarantee per person can be fully used.

Full details are not available as on date about this bill.

The last but not `the least is that the Luck of the investors which might reward some of them with high returns.

Views expressed above are for general guidance only and author do not accept any liability or responsibility of whatsoever nature as each investment has to be checked fully before investing.

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