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Personal Finance - Does Your Investment Suit Your Life Goals?
28-Nov-2017
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You have to ask a lot of questions before committing to an investment. But the due diligence is often limited to looking at the risks and returns. To check the suitability of an investment, one needs to do more. Here are some factors you must consider during your investment process.

Go beyond returns
A 10% expected return may seem a good reason to invest. But that alone is not enough. Look at how the returns are structured. If your goal needs periodic funding, then the investment too must provide periodic returns, such as fixed deposits, bonds or monthly income schemes. If your investment is in equity, where the return is more from appreciation in value, generating a regular income would be difficult.

Similarly, if you are investing in a debt product—such as a bond that gives periodic interest income—with an aim of accumulating wealth for long-term goals, it is important that interest income is reinvested. Funds left idle or reinvested at lower rates will imply a lower corpus value than expected. An investment product that allows automatic reinvestment is more suitable here than a product with periodic payout. Some investments provide the flexibility to structure returns as income or capital gains.

Know how the risks affect you
Go beyond the categorization of an investment’s risk as high or low. Look at how the risk will affect your goals. Selecting a money market fund, because you see it as a low-risk investment, may mean that you are exposing your goal to the inflation risk, if you use this product for a long-term goal. Or, avoiding an investment because it is categorized as high-risk in the short term, as is the case with equity investments, even when you have the advantage of a long-investment horizon, may result in being under-funded. Similarly, a safe investment can mean low returns. Align the risk to your investment plan.

Ease of investing
There are some prerequisites to investing—for example: Know-Your-Customer norms, PAN card and routing the investments through your bank account. Then there are specific requirements. For example: to invest in securities, you need a demat account; to invest in government securities you need a special account with a primary dealer to deal in and hold the securities. Also consider the ease of obtaining and submitting applications and modes of payments. Being able to make and manage investments easily is an important parameter.

Match the fund flow
It may not always be possible to time the investible cash flows with investment opportunities. When that is a constraint, look for investments that are available through the year and allow investments in smaller instalments, if necessary. Some investments can be made only as a lump sum amount, such as an initial public offer (IPO). However, products that allow smaller investments may have minimum amount requirements, and the returns will depend upon the prevailing price or interest rate at the time of each purchase. Some investments need a minimum number of instalments upfront. Mutual funds require such a commitment on systematic investment plans (SIPs), though investors can cancel the SIP by giving due notice. Some investments need a minimum annual investment and there can be penalty for not adhering to it, for example, Public Provident Fund (PPF).

Focus on costs and taxes
The real returns from your investment will be lower to the extent of costs and taxes. Consider the costs associated with the investment, such as: brokerage on stock market investments or expense charges in the National Pension System (NPS). In some cases, the costs are billed and collected directly from the investor, such as the annual maintenance fee on a demat account; or it may be deducted from the value of the investment periodically, such as the expenses related to mutual funds, or it may be in the form of exit loads and other fees at the time of redemption.

Similarly, taxes also eat into the returns. Some investments, such as mutual funds, allow you to structure returns as income or capital gains depending on which is more tax-efficient for you. So, look at ways to maximise net returns.

Liquid in investment
You may need to liquidate the investment earlier than planned, so investments with lock-ins, such as tax-saving instruments, may not be suitable. Others may have a penalty or load for premature withdrawal, like a bank fixed deposit. If the investment value is likely to fluctuate, then you may be withdrawing from the investment when the values are down. Some investments can be redeemed at any time, such as in the case of open-ended mutual fund. Some investments, such as mutual fund holdings, can be redeemed partially, and some cannot, like a post office saving. The facility of taking loans against the investment is also a way to generate liquidity without selling the investment.

What is your recourse?
The ease with which you can register complaints and receive resolution is an important investment feature to consider You are entitled to information about your investment and its performance. The extent of information that you get and its frequency help you monitor performance. Read the small print to understand the features of the investment before you decide to include it in your portfolio.

Not all features are equally important to all investors. Select the investment that best reflects your needs.

Source : LiveMint back