The Hindu Business Line : How good is your investment?

Madhuri, an avid investor claimed that she had an investment portfolio of Rs 10 lakh built over a period of two years of savings. She narrated her feat to Amrita, an investment analyst. Out of curiosity, Amrita asked her what was the return on the same. Madhuri was bewildered. She had never computed returns! Amrita explained to her that what is important is not the cost of the investment but its current value.

An investment portfolio has to be valued based on the current market price of securities, to which you add interest/dividend earnings and reduce expenses/ interest on borrowed funds.

When she computed this, the total return on capital was a negative 20 per cent. Her investment value had shrunk to Rs 8 lakh. In case you have a similar story, do read on…

Many a times, while making an investment, we overlook the basic principles of investing. This may be due to ignorance, time constraint or slack attitude.

Because of this, even those who save systematically can fail to create wealth. Here is a simple checklist through which one can put all investment options, before deciding to take the plunge.

Weigh every investment for the below mentioned attributes:

Liquidity: It is the ability to encash your investment at the time of your choice — either immediately or within a short time. Investments with a long lock-in period can affect your ability to realise cash in time to meet your goal. (close-ended mutual funds, PPF etc. which have long lock-in periods).

They may also involve opportunity loss as you may have to forego other avenues, while you are locked in. If an instrument offers low liquidity, evaluate if it offers higher returns to compensate.

Risk: Riskier the investment, the higher should be the returns. Risk can be simply defined as the possibility of losing money on your investment. No point in putting money in an investment with high risk, where the return potential is not proven, through hard evidence. The “teak” schemes of yesteryears are a good example.

Returns: The returns expected and the time horizon over which these are expected, should be clear in the mind of the investor. Investors in equity mutual funds should not expect the superlative returns possible from direct investments in one or two stocks. Similarly, investors putting money into equity in a bull market often expect recent returns to continue; but blips and corrections are part and parcel of equity investing.

Safety: This feature is important especially for senior citizens and those with a low appetite for risk. Investment in equity and equity-oriented mutual funds, gold funds and derivatives are a risky affair and may lead to erosion in capital. On the other hand, post-office savings, GOI Bonds, Bank FDs offer lower risk with much better safety.

Convenience: The investment should be in avenues that allow you to monitor and transact conveniently without any hassles. A few years ago, investing and withdrawing deposits with the post-office involved serpentine queues.

Once you’ve put your investments through this checklist, here are a couple of other tips:

Do consult your financial advisor, but only for advice.

Don’t ask him to make your decisions, as what you require is best known to you. Regularly evaluate your investment portfolio to make decisions.

Remember investing is an art as well as a science. Wealthy investments require healthy methods!

(The author is an ACS, AICWA. He is a free-lance writer.)

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