Low Risk Investments:

Low risk investments are predominately cash, fixed interest and superannuation. This
has the lowest risk of all investments but has also the lowest return – in today’s
market, approximately 3% to 6% per annum. Fixed interest includes cash, cash
management trusts and bonds. They return approximately 5% to 10% per annum,
sometimes as high as 15% if you invest in global bonds in good markets.

Superannuation returns and risk profiles vary from institution to institution, however
the best and safest usually return on average 10% per annum.

Medium Risk Investments:

Medium risk investments include property and non-speculative shares. Diversified

funds, which invest in a range of asset groups, are also considered to have medium
risk profiles. Average returns from these types of investments will range from 8% to
15% per annum.

I also like to include the broad spectrum of mutual funds, to be discussed later, in the
range of medium risk investments. Some can return up to 25% and more depending on
the fund type and managers.

High Risk Investments:

High risk investments include all speculative shares, futures and any other type of
investment that is purely speculative by nature. Because with these types of
investments we are betting on whether the price will go up, or sometimes down, I
often classify this as a form of gambling. Accordingly, the returns are unlimited but so
is the ability to lose the total money invested.

Types of investment…

Financial Instruments
Equities
Equities are a type of security that represents the ownership in a company. Equities are traded
(bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering
(IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option
as the returns on equities over a long time horizon are generally higher than most other investment
avenues. However, along with the possibility of greater returns comes greater risk.

Mutual funds
A mutual fund allows a group of people to pool their money together and have it professionally
managed, in keeping with a predetermined investment objective. This investment avenue is popular
because of its cost-efficiency, risk-diversification, professional management and sound regulation.
You can invest as little as Rs. 1,000 per month in a mutual fund. There are various general and
thematic mutual funds to choose from and the risk and return possibilities vary accordingly.

Bonds
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both private
entities, such as companies, financial institutions, and the central or state government and other
government institutions use this instrument as a means of garnering funds. Bonds issued by the
Government carry the lowest level of risk but could deliver fair returns.

Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These
instruments are at the low end of the risk-return spectrum.

Cash equivalents
These are relatively safe and highly liquid investment options. Treasury bills and money market funds
are cash equivalents.

Non-financial Instruments
Real estate
With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.

Gold
The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today,
beyond physical gold, a number of products which derive their value from the price of gold are
available for investment. These include gold futures and gold exchange traded funds

Why you should invest…?

Take a minute to think about why you may want to invest

 Inflation is constantly increasing the cost of goods and services and eating into
the value of your income and wealth. You need to save money and invest it well so
that the value of every rupee is augmented.
 Higher life-expectancy means people live longer and hence, need more money
to maintain their living standards.
 Investing selectively allows you to enjoy tax benefits.
 By investing wisely you can improve your standard of living and create wealth
for the future

Factors which influence the decision to invest..?

Past market trends

Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to
understand how various asset classes have performed in the past before planning your finances.

Your risk appetite

The ability to tolerate risk differs from person to person. It depends on factors such as your financial
responsibilities, your environment, your basic personality, etc. Therefore, understanding your capacity
to take on risk becomes a crucial factor in investment decision making.

Investment horizon
How long can you keep the money invested? The longer the time-horizon, the greater are the returns
that you should expect. Further, the risk element reduces with time.

Investible surplus
How much money are you able to keep aside for investments? The investible surplus plays a vital role
in selecting from various asset classes as the minimum investment amounts differ and so do the risks
and returns.

Investment need
How much money do you need at the time of maturity? This helps you determine the amount of
money you need to invest every month or year to reach the magic figure.

Expected returns
The expected rate of returns is a crucial factor as it will guide your choice of investment. Based on
your expectations, you can decide whether you want to invest heavily into equities or debt or balance
your portfolio.

How and when to invest…?

When to invest:
It's never too late or too early to start investing. The best time to invest is now. The 4 keys that could
guide you regarding when to invest are:-

1. Start investing early- Start early and retire rich. Invest whatever you can today and move
steadily towards a secure tomorrow.
2. Invest regularly- Invest regularly and methodically and let the magic of compounding work
for you.
3. Never time the market- Be a smart investor. Always invest in time but never try to time the
market. Timing the market is mastered by none and is beyond one's control.
 4. Be patient- For long-term wealth creation, you need to be patient. The longer the investment
horizon, the lesser is the risk and greater are the returns.

How to invest:
You toil hard to earn money and, therefore, it is important to invest it wisely. Ask yourself certain
questions before deciding on how to invest:

1. What are your needs and financial goals? Do you need a regular income or want to buy a
house or require funds for your child's education?
2. How much risk are you willing to take on? Can you withstand the volatilities in the capital
market or are you satisfied with a low-risk, low-returns philosophy?
3. How soon do you need the money? Can you invest for a longer time-horizon or do you need
money in the near future?
4. What are your cash flow requirements? Do you need a regular income or a lump sum amount
after a certain period of time?

By answering these questions, you will not only be able to financially quantify your needs but will also
be able to set the foundation for a sound investment strategy. The next step is to contact our
Relationship Manager, who will understand your requirements and help you in building and managing
your investment portfolio

Investment dictionary
Balanced fund
These funds invest in debt and equity instruments. The proportion of investment in debt and equity
can vary and these funds offer a balance between risk and return.

Debt fund
Funds that invest in medium to long-term debt instruments issued by private companies, banks,
financial institutions, governments and other entities are known as Debt / Income Funds. These funds
are low risk profile funds and generate fixed and regular income although these are less risky than
equity funds; they are subject to liquidity risk, interest rate risk and credit risk (the risk that a bond
issuer will fail to repay interest and principal on time). These funds can be further classified as debt
funds, Fixed Term Plans, etc.

 Debt funds invest in a host of fixed income instruments i.e government issuances, corporate
papers and short term papers.
 The Fixed Term Plan Series are closed-end schemes of varying maturities which invest as
per their defined time line.

Entry load
The fees or charge paid by the investor at the time of buying units of a mutual fund is called the entry
load.

Equity fund
Equity funds fall into the highest risk category for mutual funds and have the potential to offer the
highest returns too. Ideally, like equities, equity funds must also be held for the long term, i.e. for 3
years or more. Equity funds can be further classified as aggressive funds, sector funds, large cap, mid
cap or small cap funds, diversified equity funds, etc.
 Aggressive equity funds offer the maximum scope for capital appreciation as the funds invest
in less researched and under owned shares. Such investments are most volatile and prone to
higher risks than other types of equity funds.
 Sector funds/ Mid cap or small cap funds have stated criteria for investments and their
portfolios comprise of only those companies that meet their criteria. Sector funds invest in a
particular sector say banking, technology or pharmaceutical etc.
 Mid cap and small cap companies invest in companies with a mid sized or low market
capitalization, respectively, as per their definition. These funds invest only in certain segments of
the equity market and are thus, comparatively more risky than diversified funds.
 Diversified equity funds invest across the equity space into large, mid and small cap funds
and have exposure to a host of sectors thereby reducing sector-specific or company-specific risks.

Exit load
A charge levied on an investor at the time of redemption of mutual fund units is called the exit load.

Gilt fund
These funds invest mainly in government securities.

Index fund
These funds invest in stocks that make up a particular stock market index (such as the BSE Sensex
and NSE Nifty) in the same proportion as the weightage given to each stock in the index.

Inflation
Inflation can be defined as a sustained increase in the general price levels (wages, prices of goods
and services) across the economy over a period of time.

Load
The purchase or redemption fee charged by a mutual fund when an investor purchases or sells units
of the scheme, respectively, is called the load.

Mutual fund
Mutual funds are money-managing institutions which pool together money invested by a number of
individuals and institutions and further invest it in various securities from the fixed income and equity
space. The investor enjoys the gains of the fund and shoulders the losses in proportion to their
contribution to the overall fund.

Net asset value (NAV)

The NAV of a scheme is the rupee value of one unit of that scheme. Broadly, it is calculated by
dividing the total value of the fund by the number of units. More specifically, NAV = (Market Value of
the fund's investments + Current assets + Accrued Income - Current Liabilities - Accrued Expenses) /
Number of units outstanding.

Power of compounding returns

Systematic Investment also gives you the benefit of compounding returns. Compounding works best
when you begin early as the returns on returns deliver a snow ball effect to your investment.

For instance, if you start investing Rs 2,500 per month from the age of 25 years, in an instrument that
offers 8 per cent return per annum, then, by the time you reach 65 years of age, you will collect Rs
77.72 lakh. But if you delay your investment by just 10 years, even if you raise the annual investment
amount to double (i.e. Rs 5000 per month) you will land up with just Rs 67.97 lakh.( Refer to the table)

Regular investment Rs. 2500 Rs. 5000

Age at the time of starting 25 years 35 years
investment
Age at the time of maturity of 65years 65 years
investment
Rate of interest 8 per cent 8 percent
Maturity amount Rs. 77,71,696 Rs. 67,96,993

Rupee cost averaging

Over the long run, systematic investment brings down an investor's average cost per unit. This is how:
If you invest Rs 3000 in a mutual fund XYZ at an NAV of Rs 10, you will get 300 units. But instead of
the one time investment you invest regularly for three months (assuming the NAVs at the time of
investment are as depicted in the example below), you'll get 308.54 units. Thus, the average cost per
unit comes down to Rs. 9.83 (Refer to table to below).

Time Monthly Investment NAV(Rs.) No. of Units

January’2007 Rs. 1,000 10 100
Feburary’2007 Rs. 1,000 8.50 117.64
March’2007 Rs. 1,000 11 90.9
Total Rs. 3,000 9.83 308.54

Systematic investment plan (SIP)

An SIP is an investment strategy offered by mutual fund houses, where one invests fixed amounts at
regular pre-determined intervals (monthly or quarterly) in a mutual fund scheme. The number of units
one gets each time depends on the prevailing Net asset value at the time of the investment. The
higher the NAV, the lower the number of units and the lower the NAV the more units the investor will
receive