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I was talking to one of my friend and he said that he has learnt one thing about investments that all eggs should not be in one basket. Well, this is a very common saying when it comes to investment. But by and large, I have felt that people have only understood the meaning of this sentence on the face of it and not have realized the true meaning of the same.
What does different basket mean???
Before we discuss this in detail, let me put up a question which I often ask people – “where do you make your investments?” Invariably, he/she lands up saying that their investments are into PF, Insurances, Fixed Deposits, NSCs, Post Office MIS, Mutual Funds etc. Mind you, this is not the correct answer or I would say this is not the appropriate answer. Let me explain this with an example. If someone is investing in Traditional Insurance policies like Endowment or money back, Fixed Deposit, NSC, Post Office Schemes, etc, they all are similar investments. They are investing in Debt based securities. So just by making investment in different products, you don’t really put all your eggs in different basket. In the above example, the basket is the same but only have different compartments.
When you meet the doctor for your treatment, he understands your ailment and prescribes certain medicine. These medicines have some name but doctor does not give emphasis on names but on salts. There are various medicines available for the same salt and it is the salt inside the capsule that cures ailment and not the capsule cover. Similarly, there are salts in investments and products made of these salts are just like capsule. They are just manufactured so that the salt or investments can be easily bundled for an investor. Unfortunately, many investors misunderstand the capsule cover as investment salt and then make their financial decisions. This is not the right way of making investments.
The salts or elements of investments are called different baskets. Broadly speaking, following are basic elements.
These elements of investments are called baskets. So if you were to say that you invest in Diversified Equity Fund, PPF, gold coins, commercial property, and painting of M F Hussain; they all are made up of different elements of investments.
Why there are different elements
As each salt helps to cure some disease; similarly each elements of investment has definite purpose and its importance. If your daughter is about to get married, then real estate is not good but if she is just 5 years old, then real estate could be a good option. Each one of have different financial goals. There are some short term goals, there are some long term goals; in some goals, the capacity to take risk is high and in some capacity is less. There are goals for which you need the regular inflows and there are some for which we need lumpsum withdrawal. So we need various types of investments. Each of the elements has different set of properties.
Real Estate cannot be sold so easily but is a good investment for long term.
Debt does not beat inflation but does not fluctuate in short term.
Equities have potential to create long term wealth and can easily be bought and sold in parts but are very volatile in short term.
Gold is an alternate currency and can be ofgreat use when there is a great disturbance in financial markets but over long run has given below inflation return.
So there are so many plus points and minus points with each element of investment. A good investor is one who matches his needs with the best of all the options he has for investments. So for a father of 5 year old daughter strategy can be PPF, a SIP in diversified Equity funds and a term policy to cover risk in case of any unfortunate event takes place. For a father of 20 year daughter who is about to get married, a bank fixed deposit or a short term plan or even Fixed Maturity Plan may be a good option.
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