Invest sensibly for a prosperous future

Vaibhav Sankla

Diwali, the festival of lights and prosperity brightens up our lives each year. The festive season starts with the advent of navratri and goes on until post Diwali. It is a time to fulfil the long unfulfilled aspirations and wishes of your loved ones and even yours. Many employers even give out a Diwali bonus during this period so that employees may indulge in the festivities and fulfil their dreams.

However, even if one has many aspirations and dreams we all know that there are some that cannot be fulfilled in short term. Though consumer durables and electronics like a new and latest model of TV, smartphone, jewellery can be planned with ease, when it comes to big dreams like buying a new house, it needs some meticulous planning.

This can, however, be sorted with the help of a wishlist that prioritises your desires. Your financial goals for life also play a vital role.

Making a good investment decision

The first step towards this is to make sure you have a secured future.

This can be done by investing in a term insurance policy that makes sure that your family lives the same lifestyle even in the case of any unfortunate incident. Once this is done you may look for avenues to invest like bank deposits, equity fund, debt fund, bonds, stock, gold/bullion, etc. But when someone is opting for any of these options, it is important to consider following factors:

n Minimum expected return on investment (ROI)

n Associated risks

n Minimum investment period to fetch the expected return

n Transaction cost

n Associated tax impact (net of tax return)

n Liquidity

While each investment product has its own advantages and risks, you have to blend a perfect mix of these different investments to form an investment portfolio which can help you achieve your dreams with minimum risk. You must remember one thing, don't put all your eggs in one basket. Diversify your portfolio to mitigate the associated risk and optimise the returns.

If you find it difficult or don't have required time to go through all this hassle, you can consult a reliable financial expert. One must not mistake insurance product as an investment tool. Most of the traditional/endowment insurance plans give you a very low ROI of 4-6% and the risk cover which they provide is also not sufficient considering the premium one has to pay.

Stock market investments

Stock markets can also offer you a good opportunity to invest and earn in order to make some good returns on investment. However, another common financial mistake committed by many is getting lured by the fortune others make from trading in the stock market. Investing in equity markets requires a lot of time, patience and expertise. Though equity market can provide you big ticket returns, it is equally prone to making you lose significantly.

Making sensible buying and selling decisions at the right time is very important to earn some good returns from the market. Usually well diversified equity portfolio can give you good returns over 3-5 years. Also, if you have invested in equity market for long term, most of your earnings in the form of dividend or capital gain will be exempt from tax. But, if you don't have the sufficient expertise on the stock market you can opt for mutual funds with a proven track record. Mutual funds can provide you the returns comparable with the equity trading at much lower risk as the funds are managed by experts.

Buying a dream home

Usually buying a first home is a long-awaited dream for many and there could be no better time for fulfilling this dream than the auspicious festive season. Owing to this, there is an uptake in property sales during these festive seasons.

This decision calls for a thorough thinking and also needs to be vetted from an angle of either to buy or rent a house. Although buying a house is an emotional decision and has a big mental security attached to it, it may not be a viable decision at times.

If we remove the emotional angle from the decision making and consider it purely on financial grounds then many times it makes more sense to rent a house. You just pay a net of tax rental of 2-3% (considering HRA benefit) of the property value as against a net of tax interest 6-7% (considering the interest deduction) on your housing loan. So if you don't expect your property value to appreciate at a rate significantly more than 6-7% then it is better to rent a property.

Renting is more suitable for the younger people who have just started their career as paying high EMIs can be burdensome for them. Further, they can enjoy the flexibility of relocating to any other city for a better future. At the same time, if they regularly and sensibly invest the money which they would have otherwise paid in the form of EMI, they can earn significantly higher return than the appreciation in the property value they have to pay in future once they are settled in their career.

Some more important considerations while taking that decision to buy is to do a thorough check on the background of the builder, the project one is investing in, knowing the property rates for the comparable property etc.

But once the decision to buy a property is made, one should not get trapped in the deals offered by developers etc. Though on surface one can't see significant drop in the property prices but if someone tries to negotiate judiciously, he can crack a good deal. Due to the current sluggishness in the market, there is a huge inventory piled up in the property market, which is expected to bring down the property prices to a further level. So it makes more sense if someone delays buying for some time.

Another important factor one should consider before investing in real estate is whether to invest in an under-construction property or a finished project? There was a time when the ready-to-move property were sold at a premium of 10-15% premium but in the current market situation this has come down drastically and it makes sense to invest in a ready-to-move property. Think of the situation where the possession of the property is delayed and you have to pay already over stretched EMI with your monthly rentals, this can cause you a real mental and financial strain.

Hence, looking at all possible areas will lead to a better investment. Happy festivities...!

The writer is Director, H&R Block India. The views expressed in this article are his own