The purpose of this article is to summarise the broad investment avenues

available to a middle class working person.

Investment Versus Speculation: An investment is a choice made by an individual, after at least some careful analysis or thought, to place or lend money in a vehicle or an instrument or a combination thereof (such as property, company or bank deposits, shares, mutual funds, securities, bonds) that has sufficiently low risk and provides the possibility of generating returns over a period of time.  Placing or lending money in a vehicle that risks the loss of the principal sum is, by definition, speculation not investment.

The present scenario: In the Indian scenario, a small percentage has found its way into the share market. In advanced countries, a very high portion of household savings are into equity or equity based mutual funds. One reason for this is that in advanced countries like those in Europe and USA, well-established protection is in place in the form of social security measures and in India one is left to his own self in the post retirement period. The working class now however understands the benefits of regular investment and it is expected that over a period of time the investment in equity market would also increase.  During the last few years inflation has been ranging between 7% and 12% and it is only recently that inflation somewhat appears to be tamed. However food inflation, (something which immediately affects the working class) continues to be high. Any saving avenue that gives one a fixed rate of return has to be seen in conjunction with the inflation rate and almost all such investment avenues give a negative rate of return, if one subtracts the inflation rate from the interest rate earned.  Thus, if one is getting a 9% GRR (Gross Rate of Return) on his Bank deposit, and if the inflation stands at 11% p.a., the NRR (Net Rate of Return) is @ minus 2%p.a. If one doesn’t do anything else and keep his entire investment in Bank deposits or similar instruments and assuming that one does not pay tax, one’s money is automatically going to provide a negative NRR. Unless one has at least a part of his investments earning a return higher than the inflation rate, this situation will sadly continue. 

Why should one invest?: Guarding against inflation is just one of the purposes. A regular habit of investment will:

1. ·      take care of one’s regular and unforeseen medical needs,
2. ·      take care of some pleasure trips and holidaying,
3. ·      take care of one’s day to day needs and above all,
4. ·      take care of one’s self esteem, so that one does not have to be dependent either on his children or any other help coming to one’s way. 

In-fact every working person must move from a stage when he works for money to a stage when money starts working for him.

How much should one invest?: There is no ready answer for this. One must calculate one’s monthly funds required for conducting day-to-day life activities smoothly, as on today, and add a contingency provision to the same. This amount is needed today per month. One must adjust this for inflation say at 10% p.a. A simple calculation shows that if one needs Rs.30000/- per month at today’s prices, one is going to require Rs.48000/- p.m. after five years, Rs.78000/- p.m. after ten years and so on. Any further calculations will be scarier.

How does one increase the average GRR / NRR?: The various investment options available in India have historically given returns ranging from 0% to 18%. Returns are 0% if cash is held and highest returns have come from share market (as measured by the rise in SENSEX or NIFTY).  Following table summarises the return and risk profile of various saving instruments.

Risk Profile	Investment made in	Annual return (%)	Effective return after tax @ 10%	Effective return after tax @ 30%
Zero Risk	Savings account in nationalized banks	4.50	4.05	3.15
Zero Risk	Postal schemes such as fixed deposits, monthly income scheme, KVP, recurring deposits, National Savings Certificates (NSC)	8.00-8.50	7.20-7.65	5.60-5.95
Zero Risk	Traditional LIC policies	6.00-6.50	5.40-5.95	4.20-4.55
Zero Risk	RBI Bonds	7.50-8.00	7.50-8.00	7.50-8.00
Zero Risk	Recurring or time deposits in nationalized banks	7.00-8.75	6.30-7.88	4.90-6.13
Zero Risk	PPF accounts in post office / nationalized banks	8.50	9.44	12.15
Medium Risk	Company deposits (Rating ‘AAA’ or ‘AA’	9.00-11.00	8.10-9.90	6.3 0-7.70
Medium Risk	Balanced mutual funds (debt oriented)	8.50-9.70 (over one year time frame)	7.65-8.70	5.95-6.80
Medium Risk	Balanced mutual funds (equity oriented)	8.00-13.20 (over one year time frame)	8.00-13.20	8.00-13.20
Medium Risk	Gold	10.20 (Feb10 to Feb13)	9.20	7.14
Low Risk	Savings account in private well capitalized banks such as ICICI, AXIS, HDFC, KOTAK, YES	6.50-7.00	5.85-6.30	4.55-4.90
Low Risk	Liquid mutual funds	8.50-9.50	8.50-9.50	8.50-9.50
Low Risk	Traditional policies of private insurance companies	6.50-7.00	6.50-7.00	6.50-7.00
Low Risk	PPF account with private bank	8.50	9.40	12.10
High Risk	Equity oriented mutual funds	10.20-16.30 (over one year time frame)	10.20-16.30 (held over one year)	10.20-16.30 (held over one year)
High Risk	Property	Can’t say	Can’t say	Can’t say
High Risk	Select shares in the share market	Can’t say	Can’t say	Can’t say
Extremely High Risk	Derivative products in the share market such as futures and options	Can’t say	Can’t say	Can’t say
Extremely High Risk	Commodities futures	Can’t say	Can’t say	Can’t say
Extremely High Risk	Property mutual funds	Can’t say	Can’t say	Can’t say
Extremely High Risk	Private Equity (PE) funds for unlisted companies	Can’t say	Can’t say	Can’t say

Bank Deposits – Precautions: As indicated earlier in this article, a major chunk of household savings are in bank deposits and therefore one should take some precautions while depositing the hard-earned savings in a bank. Firstly one should check whether the bank is covered under the deposit insurance scheme of DICGC i.e. Deposit Insurance and Credit Guarantee Corporation of India.  (www.dicgc.org.in) This is an arm of the RBI, which provides an insurance cover for the bank deposits to the extent of Rs.1 lac per person.  As a rule therefore, one should not invest an amount of more than Rs.1 lac in a single Bank in one name.  From time to time the RBI reviews the list of banks approved for the DICGC cover. As on 12^th April 2013, there are 2199 banks covered for insurance. The banks, (particularly co-operative banks) which do not meet the RBI norms or have become weak banks, loose their ability to get covered under DICGC. One must ensure at the time of placing a deposit that such banks, while giving higher rate on deposits, are continuing to be covered. So far as the company deposits are concerned, there is no such cover and one must check the rating by the Rating Agencies (such as ICRA, CARE, CRISIL Fitch etc.), which should be at least “AA”.  This usually means that the deposit is reasonably secured and ensures timely payment of interest and repayment of principal.  Any rating lower than “AA” should be viewed with suspicion and caution.  There are several cases of investors losing their money, by the companies suddenly becoming sick. Thousands of investors have lost crores of rupees of precious savings. In Mumbai itself there have been several companies which have gone bankrupt and investors have a feeling of having been duped.

Some observations: It would be seen from the table given earlier that except for investments in equity mutual funds, all other investment avenues are giving returns below the inflation rate; thus, making them instruments of negative return.  How should one decide the break up of investments in debt (Read: Safe) and equity (Read: Risky)? There is a well-known “rule of thumb” formula suggested for the investment pattern.  It is obvious that as a person grows older, his ability to take risk reduces and therefore with advancing age, his investment exposure in the share market or equity mutual funds should reduce. A generally useful formula is, a percentage equal to (100 minus one’s age in years) should be the amount that one should keep in equity, and the balance in debt. If one is 20, 80% of his investment could be in equity and 20% in debt. But at 60, one’s exposure to equity should be less that 40%. This rule may need a review and fine-tuning on a case-to-case basis and the advice from a qualified Certified Financial Planner (CFP) should be sought to tailor-make one’s individual investment pattern to suit one’s personal needs.

While it requires a high amount of expertise in taking risk on an individual share in the share market, an easier route would be to invest in the share market through mutual funds.  Mutual Funds are managed by expert fund managers who invest one’s money in a basket of various shares thus reducing the risk associated with an individual share. One may have no doubt heard several stories where people have boasted about making lot of money from a particular tip; however, a larger number of stories where people have lost a lot of money by following such tips will never circulate.  There have been people who have made a lot of money by tracking a single share for several years and also people who had to sell their house for speculating in unknown shares in Harshad Mehta’s time. A better option as mentioned earlier, is to invest in equity based mutual funds.  Some reliable sources for up to date information on mutual funds are now fortunately available such as www.moneycontrol.com, www.valueresearchonline.com and www.morningstar.com. These websites do a lot of research on the happenings in the mutual fund industry and the return and other calculations are updated on a daily basis. I particularly like the thorough research and unbiased opinion by www.valueresearchonline.com. They also publish a monthly by the name Mutual Fund Insight and is a comprehensive and reliable guide on mutual funds. I would strongly recommend all investors to invest in a yearly subscription at around Rs.1000/ p.a. for this magazine, which will pay for itself even if one acts on one useful suggestion given therein.

Choosing a Mutual Fund: While this article can go on and on, I wish to briefly summarise the suggestions for choosing the mutual fund route :

• ·     Referring to any of these websites short-list initially those mutual funds which are in existence for more than 5 years.
• ·      Arrange them in a decreasing order of returns (a better criteria is returns over 3 /5 years time frame rather than a one year time frame).
• ·      Out of the shortlist, omit those funds, which are too small.
• ·      Further in the short list, remove all the funds, which do not have a 4 star or a 5 star rating.
• ·      Avoid any sectorial or thematic funds since you will be taking risk on a particular sector or a theme (such as pharmaceutical fund, IT fund, etc.).
• ·      Never make a lump sum investment in any fund, instead use the SIP route (Systematic Investment Plan) to make investments in the chosen funds. A variation of SIP is a Systematic Transfer Plan, STP.
• ·      Diversify the risk in not more than 5 top funds. 
• ·      The SIPs should coincide with different dates in a month such as 7^th, 14^th, 21^st, 28^th for 4 funds or 10^th, 20^th, 30^th, if you have 3 funds and similarly in case you have larger number of funds.
• ·      Never discontinue SIP even if the market crashes, in fact look at it as an opportunity to buy cheap.
• ·      Remember that all equity investments kept over 365 + 1 days are tax-free since these are considered as long-term gains and never dis-invest before 366 days.
• ·      If you have not utilized the deductions under Chapter – VI of Income Tax Act, concentrate firstly on the tax saving mutual funds schemes and any amount over and above these may be invested in other equity funds. 
• ·      Review your plans and investment pattern every six months and check that your chosen mutual funds continue to be in the 4 star or 5 star category.  There are examples such as Reliance Growth Fund, which was for a long time in the 5- star category, but now has come down to a 3 star category.  
• Considering all the points mentioned above, you would obviously ask whether any specific funds could be recommended at this stage.  The recommended list keeps undergoing a change and as on 12^th April 2013 the following funds are the top performers in their respective theme. 

(Source: www.valueresearchonline.com)

Category	Name of the top performer	Annualised returns on a 5 year time frame
Equity – Large-cap	Franklin India Bluechip	8.45%
Equity – Large and Mid-cap	Quantum Long term equity	11.56%
Equity Mid and Small-cap	ICICI Prudential Discovery	15.74%
Equity Multi-cap	ING Dividend Yield	11.44%
Equity Tax saving	Canara Robeco Equity Tax Saving Scheme	11.56%
Gold Fund (ETFs)	UTI Gold ETF	18.05%
Balanced- Debt oriented	UTI CTRS 81	10.74%
Balanced- Equity oriented	HDFC Children Gift Investment	12.62%

Some more suggestions: All things considered, the following useful suggestions can be given in respect of investment matters :

1.     Earlier in life (at least before 45 years of age) open a PPF account, deposit Rs.1 lac every year till you can and build a corpus, which will be handy when you are 60 years.  If you do not need the maturity proceeds, you can continue the account for a further period of 15 years without any loss of benefit.  You can always make partial withdrawals in case you need funds.  Please remember this is the only instrument in the Indian market which give you “EEE” benefit whereby the investments get you an immediate tax rebate to the extent of Rs.1 lac p.a., the interest earned is fully tax free and the maturity amount when received after 15/20/25/30 years is fully tax free.

2.     Never revolve credit card dues since it attracts interest @42% p.a. 

3.     Do not let money lie idle in the savings bank account.  Opt for the auto sweep / reverse sweep facility offered by the Bank.

4.     Except house, never buy anything on instalments. (Instalment plans typically attract a 36% or higher interest!)

5.     Save to the extent it pinches the pocket (but only slightly).

6.     Buy all the insurance that you require before the age of 35 because after that the premiums become very stiff.

7.     Do not buy any policy for investment purpose.  Please remember that insurance is for covering the risk.  It is not an investment avenue.  You will be surprised at the number of  charges which the insurance companies deduct from the amount receivable by you.  policy administration charge, switching charge, mortality charge, surrender charge, premium allocation charge are just some examples how your money is pocketed by the Insurance Companies. Don’t get fooled by ‘Guaranteed NAV plans’. Please remember that what is guaranteed is NAV (that too with lots of ifs and buts), but not the number of units, which you are entitled to. There is a steady reduction in the number of units in your account, year after year.

8.     Buy pure term policies before the age of 35 and invest the balance in tax saving mutual fund or PPF or Equity Mutual Fund.

9.     Invest some money in pension plans to augment your post retirement income, particularly if you have no pension from the employer.  Up to the age of 53 to 55 (approximately 5 years before your retirement) continue investing in diversified equity mutual funds via SIP route.

11.  Take full advantage of Chapter – VI deductions which may go up substantially after new tax code is adopted.

12.  Never buy any units under NFO (New Fund Offers)

13.  However nice and trustworthy your children may be, never transfer your assets to your children.  Because after that you are going to be “worthless” or at least ‘less-worth’ to be looked after.

14.  Instead, consider ‘Reverse Mortgage’ as a way of financing your needs by mortgaging your house and the heir will get the house automatically by paying off the dues. Or the banker may sell the house, recover the dues and pay your legal heir the balance. (Scheme available for persons above 60 years of age. For a sample scheme, visit http://www.idbi.com/loan_Reverse_Mortgage_Loan.asp)

15.  Before the age of 55 positively obtain a medical insurance cover because even if your company provides a cover that cover will cease to be when you leave the job and you will be at an age above 55 when insurance companies do not provide medical insurance.

16.  Create a No Claim Record with the insurance companies for at least 3 years and consider your premium as money lost.  This will help you to get almost full reimbursement when you actually need money for a major operation or accident, etc.

(Disclaimer: The author of this article is Madhusudan Sohani, who is a visiting professor in management schools in Mumbai. He is not a certified financial planner and advice in individual cases may be sought from qualified certified financial planners. (CFP). The opinions expressed herein are his personal opinions and cannot be generalised for all investors.)