Wednesday, June 12, 2013

How should I invest a lump-sum amount

The "lump-sum" may mean different amounts to different people. Even for the same person, the "lump-sum" can mean different amounts according to his life stage. These kind of lump-sum amounts are parked mostly for shorter term with a particular goal in mind. The goal can be anything from Buying a car, House, Children's education, marriage, retirement etc., The tenure is important to be identified before considering the investment avenues. Also, the importance of reaching the goal on time also should be considered. 

Let us assume, Raj is looking for investing 10L in some investment avenue for best returns in 2-years time frame. He expects the best returns possible during this period. What should he do?

The options for him may be.,

(1) Direct Stock investment
(2) Mutual funds
(3) Post Office savings schemes
(4) FD
(5) Purchasing land
(6) Corporate bonds/debts
(7) Insurance linked Annuity-plan
(8) Chit funds
(9) Multi-Level Marketing
(10) Leave it in the SB a/c.
(11) Gold

100% safe investment can only be Post-office Savings schemes, FD and SB a/c.

As Raj is expecting best returns possible for the two-years period, we will see each of the option in detail below.

(1) Direct Stock investment:
He can get returns in anyway from "-100%" to "220%". It really depends on the stocks he has chosen. There are some best Blue-chip stocks (like Infosys, Reliance etc.,) that could have potentially give you bad results for a two-year period. Risk here is 100%, Which means you can potentially lose all the money you put in here. As the better returns lure you, you can choose to invest part of your lump-sum (may be 10%), which can give you great returns if you hit the bull's eye.

(2) Mutual funds:
If Raj is a kind of a guy, who thinks, "I will always leave it to the professionals", they he can consider this option. Mutual funds are less riskier than stocks. It can give returns from -80% to 200%. If the market is down, you won't lose your entire money. This mutual fund will be actively managed by a fund manager, who is supposed to better in the field than a novice. If Raj is comfortable in taking the risk, then he can choose to invest part (say, 20%) of his entire lump-sum.

(3) Post-Office Savings schemes
Most of the Post-office savings schemes like Kisan Vikas Patra (KVP), Public Provident Fund (PPF) etc., are for longer term. Raj can't invest his lump-sum here if he want to get back the money in 2 years time frame.

(4) FD
If you want safety and happy with corresponding less returns, then FD is for you. The Fixed deposit gives around 9% p.a. according to the bank and is extremely safe in India. You should certainly invest some part of your money (say, 30-60%) here if you want good returns with safety of the capital.

(5) Purchasing Land
Land or Plot, as an investment option, is the most illiquid one. If Raj knows what he is doing and sure that he can get someone at the right time, he can choose this one. But, for most people, who buys land 1-5 times in a lifetime, this is best ignored.

(6) Corporate Bonds/Debts:
Corporate Bonds and Debts will stand directly head-to-head with FDs. Raj can invest in FDs than Debt funds, if he can get better post-tax returns in FD than 7%. Corporate Bonds don't come often. It is better to invest in some companies with good track record (remember, Tata) when they supply Corporate Bonds. If Raj can't find any company giving corporate bonds, then he can't apply for this. Also, this usually has more time period than 2 years. Final Verdict is, If Raj is looking for 2-years, then he can best avoid this as well.

(7) Insurance Linked Annuity-plan
Insurance is always for longer term. Also, Keep in mind that Term insurance is better than any other insurance. Insurance should never be combined with Investments is usually the key.

(8) Chit Funds
Chit Funds can be compared with Recurring deposits with loan facility. This product is not for Raj, with his current requirements. There are lot of scams happening here. So, its better to look for legit-ness of the fund before investing in any of the chit funds.

(9) Multi-Level Marketing
To start with, MLM seldom has a good business model and almost always is run with only one motto - "Lure as much people as we can". whatever the tenure and investment you are considering, its best to stay away from these scams. It sometimes looks legit initially, but screw you completely.

(10) Leave it in the SB a/c
This is the most dumb thing that any one can do. Leave only about 30% of your monthly expenses in your SB a/c. The remaining should be either in a FD or a liquid fund, that can give you better returns. The inflation just eats your money, if you leave it in SB a/c

(11) Gold
Investing in Gold is a good option for a long term. The safety that this instrument provides is considered to be great. Some part of your investment (say, 10%) should be in Gold. Remember that, Investing in Gold is usually through the Gold ETFs or Gold Fund of Funds and not through the ornaments. The ornaments have Making charges and Wastage, which eat up your returns. If you are planning to invest in gold, ornaments is not an option. As Raj is looking to invest for 2 years, he can invest about 10% of his money in Gold ETFs.

As a whole, Raj can allocate his lump-sum 10L asset 

1-1.5 Laks - Direct Stocks
2-3 Laks - Mutual funds
3-6 Laks - FD
1-1.5 Laks - Gold

Please provide your comments and your thoughts on the best plan for Raj.

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