Right risk-return balance crucial to fruitful investing

Updated: May 2 2014, 20:09pm hrs
InvestmentRisky instruments such as pure equity, offer higher returns and secure investments offer limited growth. Reuters
One of the main aims of investing is to secure ones financial future. Though investments in traditional instruments, such as savings bank accounts and fixed deposits, are secure, they give limited returns that cannot even match inflation. Its important to scout for investment opportunities that match ones expectations in terms of risks and returns.

All investment instruments require some degree of understanding, whether its the risks associated, potential returns, the timing of such returns and repayment of investment. Most people invest their money without doing enough research, which exposes them to the risk of making a loss. Investments in real estate and metals (such as gold and silver) are easy, but one bad session can wipe off the entire investment.

Broadly speaking, risky instruments, such as pure equity, offer higher returns and secure investments offer limited growth. There is no straight-jacket formula to invest towards a secured future and, as such, the investment decision depends on various factors, including the investors risk appetite. It, therefore, becomes important to first understand where are you investing.

Besides, it is important to be prepared for contingencies by having in place the necessary safeguards. Education of children, their marriage, foreign trips and house purchase are areas where the timing of returns is crucial.

At the same time, life insurance is an important element of an individuals plans. Medical insurance, too, plays a vital role in dealing with financial contingencies arising from health-related expenses.

There are certain options that can reduce your investment costs, such as bonds and commercial property. Holding a portfolio of investments with a low level of correlation can help you diversify the risks. While there is a possibility that the value of assets will be hit by inflation, shares, bonds, property and cash react differently in varying conditions, and opting for more than one asset can help you ensure better and comparatively stable returns.

To put at rest financial worries in retirement, start early. Equities and equity-linked instruments make sense if the time horizon is long. Some retirement plans offer the combined benefits of insurance and investment.

While returns are important, it is equally important to analyse the tax ramifications of each instrument to evaluate the post-tax returns. Some investment options, apart from offering higher returns, also offer immediate short-term advantage in the form of a lower tax burden.

These include investments in Public Provident Fund (PPF), National Savings Certificate (NSC), bank/post-office tax savings deposits, home loan principal repayment, Rajiv Gandhi Equity Savings Scheme, health insurance premium, interest paid on education loan etc. The tax benefit for each of these varies.

Do careful investment planning for your hard-earned money to ensure a secure future.

Rakesh Nangia

The writer is managing partner, Nangia & Co.

With inputs from Nikhil Goenka